R&D tax dispute resolution: strategies beyond the enquiry process

As a consequence of HMRC’s increased focus on compliance, more companies are finding their R&D tax relief claims the subject of compliance checks from HMRC.

HMRC’s new approach, coupled with the recruitment of case workers who may be new to R&D tax, can make the enquiry process exhaustive – and exhausting. As a result, it can be tempting to focus on the immediate challenge and neglect forward-planning.

Whatever point you are at in an enquiry, it’s vital to keep the big picture in mind, keeping all options for resolution open at every step. If you do decide to take the next step and appeal the outcome of an enquiry into your R&D tax claim, the clock will immediately begin ticking and finding the time to strategise will be even more challenging.

We talk elsewhere about how to get ‘enquiry ready’, but however well prepared you are, once an enquiry gets underway you can’t rest on your laurels. Setting the agenda, managing timelines and liaising with HMRC all help to keep an enquiry on a positive footing. At the same time, it’s important to be scanning the horizon to assess strategic opportunities to find a resolution.

Your adviser needs to be thinking ahead as the enquiry progresses. While a resolution within the enquiry process is the optimal outcome, should you need to continue your case beyond that process, you’ll want your adviser to have built the platform for a successful resolution as early as possible. For example, you should be aware of the questions HMRC can legitimately ask within its enquiry remit, understanding what you do – and don’t – need to respond to and knowing when and how to push back.

Find out more about HMRC enquiries into R&D tax claims in our overview article

Dispute resolution strategies for R&D enquiries

Enquiries can vary in length from a few weeks or months to several years, but within this timescale there are procedural levers which can be used to prompt a HMRC dispute resolution or break the deadlock. Timing is important, so having a well thought out strategy is vital. There is a skill in knowing when an enquiry has run its course – and which lever can then help you reach your desired outcome. Here are some of the options to consider:

HMRC alternative dispute resolution (ADR) for R&D enquiries

When there is no immediate prospect of resolution, with the positions of both parties seemingly miles apart, alternative dispute resolution (ADR) offers a way forward by seeking potential middle ground. An HMRC mediator trained in mediation skills and techniques works with you and the officer dealing with your case. In some cases, you may want to look at appointing an entirely independent mediator to join as an addition to the case.

The aim of ADR is to explore ways to resolve the dispute by re-establishing communication and finding areas of common ground. ADR is an option at any stage of an enquiry (including after a decision has been made) and it doesn’t affect your right to appeal.

It is particularly helpful when communications have broken down but can also be used when there are disputes or misunderstandings about the facts of a case or where assumptions have been made by HMRC.

An example of HMRC ADR is when ForrestBrown advised a company who’d been in a stalemate situation with HMRC for more than two years. After multiple rounds of correspondence back and forth and still no conclusion in sight, we recommended ADR. After one meeting, a resolution was reached which was acceptable to both our client and HMRC.

ADR can provide an off-ramp for enquiries which have become stuck in the same groove. It can be a way out of a holding pattern on a long-running enquiry and in some cases it’s an effective method of securing dialogue with a more experienced HMRC officer.

But ADR is not the appropriate forum for complaints about HMRC’s service, such as unreasonable delays in the enquiry process, or procedural errors by an HMRC caseworker. This is another example of why it’s important to have a clear understanding of the opportunities, as well as the limitations, of the different procedural options in a tax dispute.

Making a complaint about HMRC

Before making a complaint it’s important to know the remit of HMRC’s complaints team. This will inform the content of your complaint, its likely outcome and how any costs might be allocated. You can make a complaint if you’re unhappy with the service provided or if there were unreasonable delays. Remember, you should follow a different process to disagree with a decision or a penalty.

HMRC will review your complaint and carry out a ‘first tier’ review of your case, after which you will be told the outcome. There is an option to ask for a ‘second tier’ review if you disagree with the decision, under which a different officer will review your complaint. If you are still unhappy with the outcome, further steps are available, including review by the Adjudicators Office.

Remember, a complaint is not an outlet to vent your frustration or settle scores. We often see complaints fail for being too broad. You need to use this process strategically, being clear about the outcome you are seeking.

Requesting a closure notice

Another option is to request a closure notice. Sometimes it can be beneficial to draw an enquiry to a close in order to obtain an appealable decision. This gives you a control in moving your case forward and is another way out of the enquiry holding pattern.

However, you need to be aware that once an enquiry is closed and an appeal made, you are working to a legislative timetable which is largely set in stone, leaving very little room for manoeuvre. If you do appeal, a specific format must be followed. If you don’t, the appeal may be dismissed before the merits of your case are even considered.

Independent and statutory reviews

Before appealing, another route to explore is to request an independent review. This is still carried out by HMRC but will usually involve a more senior officer who has not been involved in the enquiry process. As with the complaints process, understanding the parameters of an independent review and the outcome you are seeking is important for this option to be useful in reaching a resolution.

Within the appeal process, you can ask for a statutory review. HMRC often highlight the high percentage of statutory reviews that result in a successful outcome, the advantage being that these cases avoid the time and cost associated with the full litigation process. However, the data is skewed by the fact that the majority of reviews are focused on penalties rather than technical points, where the prospect of success is more limited.

If you do take this route, it’s important to remember that on receipt of a decision following a statutory review you have 30 days to continue your appeal. At this stage, you either take your case to tribunal or accept the outcome. If you don’t do anything, the decision of the reviewing officer stands.

Appeal to the tax tribunal

For the majority of clients that come to us in dispute, we will always look to resolve the case within the enquiry process or by relying on one or more of the procedural levers above. However, if you do find yourself facing the tribunal process, the work you have done in any earlier stages of the dispute will stand you in good stead. Most unsuccessful cases in this field fail due to poor preparation.
You need an adviser familiar with the process (ForrestBrown is the only R&D tax specialist to have successfully guided a client to a successful tribunal outcome) because you will be expected to follow the procedures of HM Courts and Tribunals Service. Nobody will be automatically on hand to explain it to you. It’s important to have the right people in the room at the right time, whether that it is your legal representatives or the competent professionals who understand the technical details of your claim.
Your appeal should not simply focus on the findings of the enquiry but also address penalties – and, crucially, the mechanism of repayment. Companies need to be particularly vigilant if a closure notice could trigger a repayment of tax of any sort.
Whatever procedural lever you decide to engage, planning ahead and having a clear understanding of the outcome you are seeking is key. Thinking about this at the start of the enquiry process will enable you to lay the groundwork for a successful outcome.