A question asked by many companies when submitting their R&D Tax Claim is ‘Can we avoid an HMRC enquiry into our claim?’
Unfortunately, the answer is no, this is not possible.
But you can significantly reduce the risk of an enquiry.
In this article, I’ll be looking at understanding the importance of a supporting R&D claim report and seeking out advisers that take the time to understand your business rather than simply transact to earn fees, focusing on:
- Why avoiding HMRC enquiries cannot be guaranteed
- What happens when an R&D tax credit claim is submitted to HMRC
- What happens if HMRC opens an enquiry
- What triggers an enquiry?
- What is a risk-based approach to claim preparation?
- The importance of a supporting report
- New mandatory requirements
Why avoiding HMRC enquiries cannot be guaranteed
R&D tax relief is claimed as part of a company’s annual corporation tax return. It’s a tax item that is covered by the Self-Assessment tax system for corporation tax (CTSA). Under Self-Assessment, it’s the responsibility of the taxpayer company to get its tax filing position, with legislative requirements and associated calculations, correct.
HMRC will raise many enquiries every year to check compliance across all aspects of corporation tax. The scope of an enquiry can be broad (covering many aspects of a company’s tax profile) or narrow (a single aspect is investigated) depending on what HMRC wishes to check.
When it comes to R&D tax relief claims, HMRC has a specific team dedicated to the administration and checking of these. This team will not check every claim submission but will select a proportion of claims for further review.
The truth is, no matter what you do, it is not possible to guarantee an HMRC enquiry will be avoided.
However, there are things you can do to considerably reduce the chance of your claim being selected for enquiry. From the way you prepare your claim to how the filing position is presented in a supporting R&D claim report, doing things the right way will be a worthwhile investment of your time.
What happens when an R&D tax credit claim is submitted to HMRC?
Most R&D claims are dealt with by a specialist HMRC R&D office. For large companies, their R&D claims will likely be dealt with separately, particularly if they have been assigned an HMRC Customer Compliance Manager (CCM). However, in my experience, the CCM passes R&D tax credit claim documents to the senior Inspectors in the R&D specialist teams for review and comment.
The first stage is for the tax return containing the R&D tax credit claim to be entered onto HMRC systems. This could take place electronically through the filing of the tax return or via an administrative team that deals with corporation tax returns generally.
The HMRC system will detect that the boxes for R&D tax credits are completed on the company tax return and will refer it to the relevant specialist office.
HMRC specialist offices comprise trained tax professionals with a deeper specialist knowledge into the area of R&D tax credits. The claims will initially be reviewed by HMRC caseworkers.
HMRC caseworkers are trained professionals in relation to R&D tax credits, and do not possess widespread industry based technical knowledge. The caseworker is reviewing the claim to see if it is generally in the right format and does not contain obvious errors, so ensuring your claim is formatted and presented correctly is one way of minimising the risk of an enquiry.
Depending on the size of the claim, the degree of perceived risk or error, or potentially even the size of the company/complexity of a claimant company’s tax affairs generally, the claim will either be accepted at this stage or referred for a more detailed review by a senior member of the R&D team. At this point, HMRC may decide further information is required to satisfy any concerns and raise an enquiry.
This is where a supporting R&D claim report prepared with a risk-based approach provides content that is key to helping HMRC understandings. It is not possible to incorporate the necessary level of written detail in the company tax return. Hence, supporting R&D claim reports are prepared and submitted as part of the electronic filing bundle (company computation, CT600, Statutory Accounts and PDF R&D claim report).
What happens if HMRC creates an enquiry into the R&D tax relief/credit claim?
If an enquiry is raised, the claimant company will need to answer specific questions raised by HMRC staff (case workers and Tax Inspectors) to satisfy their concerns.
Questions could cover any aspect of an R&D claim, for example:
- Persuasion that there is a non-trivial advance in science or technology achieved through the resolution of scientific or technological uncertainty – by reference to the industry as a whole and not just your company’s own state of knowledge or capabilities.
- Explanation of costing methodologies further.
- Provision of supporting documentation around expenditure or even contracts or other fact patterns pertaining to the tax treatment adopted for the purpose of the claim.
An enquiry can take a few months to resolve, potentially including site visits from HMRC staff and a detailed invoice and contract review.
The claim might be adjusted depending on HMRC findings and, if there are obvious errors in costs claimed, HMRC could apply penalties.
What triggers a HMRC enquiry?
Whilst a claim could be selected at random for enquiry (a compliance check), most enquiries will be raised based on a risk assessment exercise, however, HMRC does not publish its risk assessment criteria!
What is on HMRC’s watch list will inevitably change from time to time depending on issues that surface from the enquiries they do raise, legislation changes or changes in HMRC interpretations of legislation.
However, although there is no published list of what HMRC are focusing on, tax professionals will have a good idea of the characteristics present in a claim that are more likely to be of interest to HMRC when checking for compliance and accuracy.
So, in my experience, it will be a combination of several factors that when taken together, could raise the profile of a claim submission within HMRC’s R&D team such that it is put forward for enquiry.
- Claims with a high value where there is more tax/cash at stake – this could be interpreted as high generally (several million for example), high by comparison to other claims within a specific industry sector; or considerably higher in a single claim period when compared to previous R&D claims submitted by the same claimant.
- Claims with attributes where HMRC has picked up a lot of errors in terms of the application of computational rules, potentially as communicated in the R&D Communication Forum “RDCF” minutes. The RDCF is an HMRC gathering of R&D agents, professional bodies, delegates from industry and business/technical and trade bodies to discuss operational delivery of the R&D tax relief schemes.
- Claims with characteristics open to differences in or changes in interpretation that impact which scheme a company can claim under or whether they should be claiming at all (e.g. how R&D work is instigated and how it is funded).
- Claims resulting in a payable credit under the SME scheme as this has been abused by contrived artificial structures.
- Claims involving more complex rule bases to ensure these have been understood and correctly applied.
These are all things that I, as a qualified tax adviser, would look to uncover, clarify, understand, and then justify as I find them – taking a risk-based approach to R&D claim preparation.
A good R&D adviser should be able to stand in the shoes of an HMRC caseworker/tax Inspector; pre-empting HMRC questions and addressing them upfront in a supporting claim report with the aim of satisfying them of compliance with the rule base.
What is a risk-based approach to R&D claim preparation?
A risk-based approach means focusing on the issues that communications, case law and legislative updates from HMRC suggest are at the top of HMRC’s watch list; and ensuring these have been identified and covered in a supporting claim report.
Appreciating which aspects of a company’s claim are likely to be of interest to HMRC means the tax filing position specific to these matters can be thoroughly researched and considered by an R&D adviser.
The R&D adviser can evaluate the key fact patterns around these areas, gather supporting evidence and decide how matters can be portrayed to assure HMRC that the complexities of the rule base have been understood and correctly applied in the claim.
Ensuring that these areas are properly dealt with through a combination of informative narratives, clear and detailed computations where relevant, and evidence-based justifications of fact patterns in a supporting claim report will help an HMRC R&D caseworker with their review.
The aim is to avoid the need for HMRC to open an enquiry just because something is not explicit, or compliance has not been clearly demonstrated.
Not all evidence or calculations will be submitted to HMRC – it’s not practical to do so. However, evaluating and gathering all supporting documentation to establish your filing position will help you to have everything ready in the event an HMRC enquiry is raised. And it’s much easier to pull everything together at the time you prepare your claim than doing this retrospectively.
The importance of a supporting claim report
It goes without saying that avoiding an HMRC enquiry is the main objective of the supporting R&D tax credit claim report – as far as possible. As noted above, sometimes enquiries are triggered at random or HMRC may still wish to know more depending on their risk assessment criteria.
An important purpose of the R&D tax credit report is to help the HMRC caseworker quickly check through the pertinent features of the R&D tax credit claim. A good R&D claim report will be packed full of relevant content to align the specifics of your claim with the requirements of tax legislation:
- Compliance with the tax rule base is demonstrated
- The boundaries of R&D are understood and correctly applied
- Transparency around the identification and analyses of qualifying expenditure to link to the R&D work in a way that is just and reasonable
- Clear and helpful explanations to highlight, inform and convince HMRC that conditions have been met across all areas of qualification (from the technical narratives, cost methodologies and application of subjective, interdependent rule bases)
Organising all aspects in a clear framework evident from a glance down the Contents page of a report will help to ensure your claim is well received by the HMRC caseworker.
You can access a detailed resource that shows you how to put together a supporting R&D claim report that focuses on the issues relevant to the guidelines here.
New Mandatory requirements
HMRC is now extremely driven to uncover mistakes and abuse in R&D tax relief claims. Increased staffing resources within its dedicated R&D team are already in place to boost the number of claims that can be manually checked for compliance.
Most recently, HMRC has announced several changes to its requirements for a valid filing of an R&D claim with effect from 1st April 2023 (applying for accounting periods beginning on or after this date):
- Mandatory digital filing of the R&D claim
- Digital claims to provide more detail on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome, and work done etc
- Each claim will need to be endorsed by a named senior officer of the company to add accountability
- Companies that have never claimed before or not claimed for the 3 previous accounting periods will need to inform HMRC, within 6 months of the end of their accounting period, that they plan to make a claim
- R&D claims will need to include details of any agent who has advised the company on compiling the claim.
Many of the bullet points highlighted above are already common practice for good R&D advisers. Certainly, this is something I have been accustomed to doing from the very beginning of my tax career in 2001.
For the new requirement of senior officer sign off, this is not such a new concept in the world of corporation tax – the senior accounting officer legislation introduced responsibility in 2009 for ensuring that the tax accounting arrangements for large companies are fit for purpose.
Whilst the application of a senior officer’s sign-off for an R&D claim will apply to all claimant companies, it should not be an issue for those who use a good R&D adviser. A good R&D adviser will take the time to explain all aspects of the claim so the senior officer can understand and confirm it is correct and accurately prepared.
The advance notification requirement is disappointing. It could be subject to change before enacted to final legislation due to feedback on the potential detrimental impact from various stakeholders. This is because many companies that have not considered the relevance of this tax relief to their activities do not realise they have a basis to claim until they come to prepare their annual corporation tax return.
Often, this review takes place more than 6 months past the end of their accounting period. If the advance notification period is not relaxed, then greater publicity around this requirement will help UK companies to become more proactive in seeking advice on their project work “in-year”. For companies that have claimed in the previous claim period, there is no requirement to notify again in advance.
Working with a specialist R&D tax adviser
I’m a qualified chartered tax adviser and a member of the CIOT, with 20+ years’ experience working in tax – predominantly corporate tax.
I work with people who are serious about getting their claims right and who value an adviser-led process delivered by a qualified tax professional that specialises in this area of tax.
If you’d like to discuss your company’s work or find out more about what’s involved in compiling an R&D claim, book a call and let’s see if your company is eligible for R&D tax credits.