What is an HMRC enquiry?
The government’s R&D tax credit incentives were introduced to help grow the UK economy and reward innovative businesses. HMRC manage and administer the government’s R&D tax credit incentives; sometimes this can include an enquiry.
When you submit an R&D tax credit claim to HMRC, your claim should be swiftly processed by HMRC – they try to work to an internal 28-day deadline. In most cases, a simple desktop review of the claim documents will be sufficient for HMRC to be satisfied and process your R&D tax credit claim.
Sometimes, however, HMRC ask for more information to clarify any questions they may have. This process is known as an enquiry.
HMRC will open enquiries into a proportion of all R&D tax credit claims. These reviews are part of HMRC’s responsibility for properly distributing the available government funds through the R&D tax incentives.
Why do HMRC open enquiries?
The reasons why HMRC might open an enquiry can vary. Their reasoning might be related to your company; a change in your circumstances, for example.
Or, HMRC may have some questions about the nature of your R&D work: perhaps about your industry, or a particular technology you were working with.
Common Reasons for an HMRC enquiry into an R&D tax credit claim
The following are some of the more common reasons behind an HMRC enquiry into a claim:
- HMRC believe they have found an inconsistency – an aspect or detail that they do not find credible in your claim. This will be highlighted in their opening letter.
- HMRC are fact-finding following a change in your circumstances, such as an increased claim value.
- HMRC have questions about your tax return – which, although unrelated to R&D – has triggered the enquiry. R&D is usually then included for completeness.
- HMRC are focusing enquiries on a particular sector or type of technology to ensure they are approaching claims in the sector consistently. A recent example of this is software.
This is why at ForrestBrown we put so much time and effort into ensuring our R&D tax credit claims are as thorough and well presented as they can reasonably be. Our claims process has a five-step quality assurance process built in, including a review by an ex-HMRC inspector. This will give you confidence and stand you in good stead during an enquiry.
How to avoid HMRC enquiries
HMRC insist upon due care and attention in claim preparations. And we ensure the highest level of care and attention is given to the preparation of all our claims at ForrestBrown. It’s why we have never had a claim rejected – and our enquiry rate was just 0.8% in 2018.
A well-prepared claim should withstand scrutiny and be paid once you have clarified any of HMRC’s questioning. A robust methodology and supporting narrative is the best way to maximize the value of your claim and protect against an enquiry in the first place. It also minimizes the risk of any reductions or penalties being imposed.
HMRC have the power to impose penalties of 0-100% of your claim value for negligence in your claims-preparation process. This is to protect the public purse from careless or dishonest behaviour. Your attitude and cooperation during an enquiry can reduce or increase any penalties.
It is important to note that any R&D tax credit claim submitted to HMRC will be reviewed. This is why, at ForrestBrown, we ensure every claim we submit is as thorough and well-presented for HMRC as it reasonably can be.
Our process makes it easy for you: our team of chartered tax advisers and technical specialists take time to understand your business and the context of your R&D work. We will work with you to create a robust methodology before preparing your claim documentation.
We have former inspectors from HMRC’s R&D unit in our team. And each of our claims is subjected to a rigorous quality assurance (QA) process. Our QA process ensures that all our claims are robust enough to withstand the close scrutiny of HMRC enquiries before they are submitted.
Three ways to reduce your chance of an HMRC enquiry
- Implementing good record-keeping measures, suited to the nature of your business. This will help you to continue to manage the risk of an enquiry on an ongoing basis;
- Creating robust and explainable methodologies for your R&D projects and related costs; and
- Demonstrating a thorough understanding of the guidelines for R&D in your supporting technical narrative.
Learn more in our KnowledgeBank
What records do I need to keep for an R&D tax credit claim?
What to do if you are facing an enquiry
… as a ForrestBrown client
ForrestBrown clients are rarely subject to an enquiry. Just 0.8% of our claims were in 2018. If you are a ForrestBrown client and the unlikely does happen, HMRC open an enquiry into your R&D tax credit claim; we will drive the whole process for you. We have considerable technical firepower, a proven enquiries process, and are experienced in liaising with HMRC.
The first stage of an enquiry will be a request from HMRC for additional information about your R&D tax credit claim.
ForrestBrown will coordinate the collection of this information and liaise with the HMRC tax inspector dealing with your case. We will work with your competent professional(s) and finance team where we need any additional detail.
Once the information is gathered, ForrestBrown will formally respond to the enquiry in writing.
Like many organisations I suspect, we are not a black and white business. Often things don’t appear to be as cut and dry as HMRC would like. Having input from ForrestBrown helped us to explain the technological advances that were being made and link them to the guidelines for R&D tax credits.Guy Hatton, Digital Director at Clinic
Sometimes this will resolve the enquiry, and HMRC will be satisfied with the original submission. In this case, the enquiry will be resolved and HMRC will arrange for the tax credit or repayment to be made.
It is likely, however, that HMRC will request an in-person meeting where they can discuss any outstanding questions. ForrestBrown will manage the entire enquiry process on your behalf, including attending this meeting. But HMRC will also want to speak to you.
When an enquiry is opened, you should expect a telephone or face-to-face meeting with HMRC. And we will be with you every step of the way. We will work with you to prepare for this, and we’ll also be present to support you in the meeting.
We encourage you to take a positive and cooperative attitude towards HMRC during an enquiry. Your attitude in any meetings can make a material difference to the outcome.
Once the meeting has happened, HMRC will review the case as it then stands – sometimes asking for further information. There are a number of possible outcomes of an enquiry at this stage:
For a proportion of research and development (R&D) tax credit claims, HMRC ask for more information. This process is known as an enquiry, and there are several possible outcomes. A well-prepared and robust claim should withstand scrutiny and be paid to you once you have answered HMRC’s questions. If discrepancies are found, your claim could be reduced and even have penalties imposed. Enquiries may highlight better record-keeping requirements for future claims.
- HMRC will accept the original submission;
- HMRC will offer the option of a negotiated settlement; or
- HMRC continue the enquiry: further meetings and discussions will be held until resolution.
It goes without saying that if it comes to negotiation, it is essential to have an adviser who is experienced at enquiry settlements, like those at ForrestBrown. Our understanding of HMRC will help ensure a mutually acceptable outcome is reached. Our fee, which is entirely contingent on our success, covers a completely end-to-end service: including support during an enquiry.
If you are using our enquiry defence service
If you are not a ForrestBrown client but wish to use our enquiry defence service, the process is slightly different:
- We will immediately make contact with HMRC to let them know we have picked up your case;
- We will review your claim process along with all your documentation, source data, and all your enquiry correspondence;
- We will then determine the amount of costs we can defend in your R&D claim. If necessary, we will rebuild the claim using a robust methodology;
- We will then recommend a strategy – this might involve defending the full amount, managing negotiation if aspects have been improperly calculated, or even preparing a revised claim;
Our enquiry support service
If you're facing HMRC enquiry, we can help.
The exact approach will be based on efficiencies and what we determine is the best course of action. As with our end-to-end client service, we can help you create and implement best-practices and record-keeping measures for your unique business needs.
Your first claim after an enquiry
The first R&D tax credit claim you submit after an enquiry is critical.
You will need to show that your new claim addresses feedback discussed with HMRC in the enquiry. You will also need to show that you have strengthened your record-keeping measures and methodology. This is particularly important if you have had a claim adjustment or suspended penalty.
Your first claim after an HMRC enquiry is typically reviewed by the same inspector that has closed the enquiry.
We’re here to help
If you need support with an HMRC enquiry, or you’d like to ensure your next R&D claim is swiftly processed by HMRC with minimal risk of one then contact ForrestBrown for a no-obligation consultation. Our expertise gives you peace of mind that your claim is not only fully-maximised, but completely defensible too.