Case Study: How to successfully defend an HMRC enquiry into your R&D Tax Credits claim

We’ve previously covered a few aspects of HMRC enquiries for R&D Tax Credit – for example the risk they pose to your business, why they happen, and how to avoid one.

However, if you ever find yourself on the receiving end of one, what is the actual process of resolving it? In this article we take you ‘behind the scenes’ into the process of successfully resolving an enquiry using a case we recently resolved.

First, a bit of background on the case: The claimant company was a food and drink manufacturer. They had originally been approached by a firm who claimed to have specialists on their team with extensive experience in preparing and managing R&D Tax Credits claims. Attracted by low fees they agreed terms and began working with them.

The claim was prepared and filed, with HMRC paying the full claim amount.

However, over a year later HMRC opened an enquiry into the claim. After many rounds of correspondence between the law firm, the claimant company and HMRC, it was becoming evident that the law firm was failing to provide answers that satisfied HMRC’s concerns, and they were not able to demonstrate that the claim met the technical criteria for eligibility and that all the costs included in the claim were allowable.

At this point, HMRC also brought in specialists to examine the technical aspects of the claim to check the validity of some of the claims that were being made. While they accepted there was eligible R&D occurring, they did not accept that the claimed costs reflected allowable R&D expenditure.

These lengthy exchanges were drawn out over a period of a full year and had become a huge drain on time and resources for the company. At this point the claimant company decided to stop working with the law firm and approached Innovation Plus.

Our first step was to do a thorough review of HMRC’s concerns and the claim that was originally filed. We found a number of key flaws in the way the claim was prepared. Firstly, the technical narrative of claim demonstrated only a superficial level of understanding of what work qualified and how to draw the boundary between qualifying and non-qualifying work. As a result, some non-qualifying costs were included while other qualifying costs were left out. For example, capital expenditure, storage and rent needed to carry out R&D had wrongly been claimed as qualifying consumables. Another error was the complete omission of subcontractors that had contributed to resolving technological uncertainty during the qualifying project.

In addition, a lack of client involvement at key points of the claims process meant that some of the claims being made in the technical narrative of the claim were not accurate. Lastly HMRC had noticed some significant costing errors, with ineligible costs being included.

Any of these errors on their own if they had been detected when submitted, could have triggered an HMRC enquiry, especially when taking into account HMRC’s recent tough stance against fraudulent or abusive practices in filing R&D claims. However collectively they had the potential to become very costly to the claimant company in penalties, additional investigations, and scrutiny of future claims.

After being appointed to take over the case, we met with HMRC and got an agreement from them to pause the enquiry while we reprepared the entire claim from the beginning in order to correct the numerous errors.

When we reviewed previous communications between the previous advisors and the claimant company, we noticed that a lot of the burden of interpreting the underlying legislation was placed back onto the company. This led to some major flaws in the company’s understanding of how the scheme really works and these errors inevitably ended up in the claim.

In order to maximise the chances of a quick resolution, we documented the differences between the old and new claims, so that HMRC would have visibility of why each change was made and how this has brought the claim up to compliance.

To ensure that all their future claims would be compliant, we worked with the claimant company to put processes in place that would guard against similar mistakes in the future and communicated these to HMRC. These steps included:

  • Advising on ways to vet future agents advising in preparation of their R&D claims and ensuring that they are competent and have a good understanding of the scheme.
  • Tagging R&D expenditure in their accounting system to be able to clearly identify qualifying consumables.
  • Recording evidence of R&D contemporaneously by using the company’s internal systems.

In similar cases where significant costing and narrative errors are made, HMRC often issues a penalty and even opens investigations into historic claims. However, our correspondences and comprehensive changes to the claim assured HMRC that the previous claim was not compliant due to the previous agent’s errors rather than the actual work that was carried out or a fraudulent intent by the claimants.  All of the steps we took gave HMRC a clear path to suspend all penalties and approve the new claim in full.

We hope you found this case study useful. If you want to ensure that your own claims are compliant or if you need help in dealing with an HMRC enquiry, please contact us or read more about our claim defence service.