In recent years it has become important for companies to be prepared to respond effectively if HMRC raises an enquiry into their R&D Tax Credit claims.
As the R&D scheme has grown in popularity and more companies have sought to benefit from the scheme, we have seen a parallel trend of HMRC putting in place stricter claim review policies and anti-abuse measures.
Although our own enquiry rate has remained consistently low for our clients’ claims (0.01% on average) this trend has likely led to higher enquiry rates across the UK.
- Significant rise in RDEC enquiries in recent years
- Introduction of the PAYE cash benefit cap for subcontracted R&D as an anti-abuse measure
- A recent report by the National Audit Office that identified low-quality R&D claims as the ‘main cause of lost tax’ (see page 37 of the report).In response, HMRC are “considering how the report can be used to continue to improve the management of tax expenditures” (Source: Accountancy Age).
An enquiry will usually take, at best, several months to resolve, and can quickly become a liability for companies both from a monetary and resource perspective. An ineffective response to HMRC’s initial query runs the risk of further increasing the scope and length of the enquiry.
Case Study of an Enquiry
Recently a software development company that had been claiming successfully for many years approached us about defending their six-figure claim after it had triggered an HMRC enquiry.
The accountancy firm that prepared the claim had not done anything different from previous years and there were a number of possibilities as to why there
- Random compliance check
- An increase in the amount claimed
- Inadequate technical documentation to support the claim
- Not identifying the software element that met the R&D criteria
- Not identifying the technological advance or uncertainties
- Not matching the costs claimed to the R&D work described
- Potential increase in ‘bad claims’ from their agent which increased the risk of enquiry on other claims they dealt with
It was clear that their methodology, structure and the level of detail provided in the claim was not sufficient and further investigation revealed that no technical people as the ‘competent professionals’ were involved in the claim process. There had been no assessment of qualifying projects, or technological uncertainty by the technical staff and apportionments had been made by the Finance Director without involvement of the technical staff.
In the initial stage of enquiry, HMRC queried numerous aspects of the claim and asked for a significant amount of additional information. In their initial correspondence alone, HMRC asked almost 30 questions with many of the questions requiring detailed, technical answers.
At this point the company felt like they could ‘do it themselves’ and answered the questions as requested.
However, in parallel, HMRC asked its Chief Technology Office team to become involved. This team consists of HMRC IT ‘competent professionals’ who act in an advisory role on R&D enquiries where domain-specific technical knowledge is required to determine if the work described meets the requirements of the legislation.
At the point where the company contacted us, it became apparent that the collation of the required information, correspondence with HMRC and reworking all the required areas of the claim, was likely going to be a far bigger undertaking than preparation of the original claim.
There was also the possibility of the claim being rejected either partly or in entirety which introduced the risk that this new information could be considered as a ‘discovery’ which meant that HMRC could then go back up to 6 years (for carelessness) or 20 years (for deliberate actions), opening up every single closed period, and demanding partial or complete repayment of those R&D tax credits, potentially with fines and interest.
We assessed the claim and determined that the work met the requirements of the legislation. At this point, we took over the enquiry, managing the correspondence with HMRC, repreparing the claim in accordance with the legislation and preparing the technical team to be interviewed by the HMRC CTO team. The enquiry was successfully concluded without any subsequent adjustment
It is imperative to get expert advice as soon as an enquiry is opened to avoid the risk of the claim becoming irrecoverable.
How Innovation Plus can Help
Innovation Plus are experts in R&D claim enquiry defence. While this is something we automatically provide when we prepare an R&D claim, we can also provide a robust defence of other claims as a separate service, ensuring that your claim value is maximised while complying fully with the tax law.
The actions that our team takes to successfully defend claims can include:
- Advising on and formulating the correct response to initial enquiry
- Making additional adjustments to the claim, if required, in order to shorten the length and scope of the enquiry
- If required, re-submitting the technical narrative and/or costings to demonstrate the claim compliance
- Liaising with your technical and/or financial teams to ensure the correct data is supplied
- Where relevant, advising your team members on questions that HMRC will ask them directly and advising on the appropriate response
- Where relevant, identifying and leveraging under-claiming as part of the enquiry defence
- Liaising with HMRC and formulating the correct responses on your behalf until the case is resolved
- Negotiating on your behalf to secure the most favourable outcome
Once your case is resolved we will also advise you on the most up-to-date legislation and processes required to maintain compliance and resilience of future claims. This is important as claims tend to be scrutinised much more closely after the first enquiry is raised.
If you require assistance with an R&D claim enquiry, contact us. We’ll be glad to give you an objective assessment of your case and some initial recommended steps without any obligation.