The Chartered Institute of Taxation (CIOT) has warned that HMRC’s recent efforts to tackle abuse of the R&D tax relief schemes and its new bureaucratic regime are rejecting legitimate claims and dissuading SMEs from submitting their claims.
In the latter part of 2022, HMRC adopted a new method for handling and processing R&D tax relief compliance checks and enquiries which it calls a ‘volume compliance approach’. The size of HMRC’s compliance team has swelled over the past year and a rigid, formulaic approach to judging individual R&D tax relief claims has been applied to a higher volume of enquiries. The crackdown has been prompted by HMRC’s continued efforts to address abuse of the schemes and in reaction to an underestimation of fraud and non-compliance, now estimated to be around £1 billion. Although volume compliance has born fruit for HMRC in other areas of taxation in the past, the technical knowledge required to understand and correctly assess complex research and development projects is a totally different beast altogether. The legal complexity of the R&D tax relief schemes is also unusually high as it involves not just UK law but the interpretation of external guidelines defining R&D.
There is evidence that HMRC compliance team staff do not possess the knowledge or expertise to assess what projects qualify as R&D and HMRC had admitted that the recent focus on recruitment has come at the cost of training. In one case, it is alleged that HMRC internal IT staff, who seemingly lacked pre-requisite tax knowledge and training, were asked to adjudicate on R&D software claim reviews and apply BEIS guidelines which have statutory force. The enquiry process and methods of communication appear to have changed too. In-person or virtual conversations between inspectors, businesses and agents were once an important mechanism through which R&D projects could be explained in detail to HMRC. Recently, a process relying upon standardised letters and an unwillingness to engage directly with competent professionals seems to have taken shape, giving claimants little to no opportunity to explain their R&D activity. The fact that poorly trained tax inspectors are wielding legal power over businesses is particularly worrisome and puts HMRC on shaky legal ground. Poorly conducted enquiries may have far reaching, existential consequences for innovative businesses whose R&D projects are genuine and qualify, when measured against scheme criteria.
CIOT members have reported that valid R&D claims have been rejected and that businesses are being discouraged from challenging HMRC due to the time and financial costs involved in taking their claim to a tribunal. Where once R&D enquiry remediation took place through phone calls and meetings, it now seems that forcing claimants into court to argue their case is the preferred option for HMRC. The cost of litigation is so extreme that it erects an effective barrier to businesses challenging enquiries, no matter how legitimate the complaint.
All of the above has led to a breakdown of goodwill and trust between HMRC, taxpayers and agents. The volume compliance approach and HMRC’s training problems are discouraging legitimate claims from SMEs and may well disincentivise UK businesses from undertaking R&D in the first place which may therefore have a negative effect on economic growth. In the future, we would like to see a modification to HMRC’s approach to R&D enquiries where it reverts back to the collaborative working principles set out in HMRC’s manuals and other standards of engagement. The launch of new compliance requirements from 8 August 2023, including the Additional Information Form (AIF), may improve access to the information HMRC requires to effectively distinguish between valid claims and those that lack merit.
The likelihood of HMRC enquiries is greatly reduced when using the services of specialist R&D tax consultants who have many years of experience preparing and submitting rigorous R&D tax relief claims and defending companies should enquiries be raised. Their expertise and knowledge are invaluable at this time of heightened HMRC scrutiny where imprecise ‘DIY’ R&D submissions can land businesses in a costly and protracted enquiry process that takes, on average, 13 months to resolve. Few businesses or accountants can afford the countless hours required to adequately respond to HMRC enquiries which takes valuable time away from servicing existing clients and conducting their day-to-day business. We have noticed that accountants are increasingly choosing not to offer advice on R&D, likely due to the higher risk of enquiries and a lack of confidence in understanding what is and what is not R&D. Enquiries can result in payout refusal or a reduced payout, penalties could be levied if deliberate errors are found, and prosecution is possible if fraudulent behaviour is proven. Despite the doom and gloom, the R&D tax relief schemes still offer businesses an attractive financial reward for their qualifying research and development activity so long as claims are judiciously and forensically substantiated and guided by the expertise of a seasoned R&D tax consultant.
How Cost Care Tax can help
Our R&D tax professionals will help you to navigate the latest R&D tax relief reforms and prepare strong R&D tax relief submissions that reduce the chance of non-compliance and HMRC enquiries. In the minority of cases where an enquiry is raised, the cost of defending HMRC enquiries is covered in our contingency fees.
If you have any questions about the reforms, R&D tax relief in general, or how to make a claim, contact our tax professionals on 0161 904 0044 or mail firstname.lastname@example.org.
Quotes from CIOT:
“We are receiving a large number of reports from our members about the difficulties being encountered by firms carrying out genuine research and development. Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so. Those businesses that do seek to challenge HMRC’s rejections seem to meet a brick wall, finding it very difficult to get a hearing for their case.”
“Abuse of R&D relief is a substantial problem, but in their efforts to tackle it, HMRC need to be careful not to throw the baby out with the bath water.”
“We are also concerned that HMRC are attempting to inappropriately apply penalties in cases where they consider no R&D has taken place. For example, we are aware of a number of cases where they have asserted that a failure to consult them in advance, instead relying on professional advice, constitutes carelessness. This is not in line with the established law around penalties, or with HMRC’s own guidance.”
“The result of this inflexible, confrontational approach is a breakdown of goodwill and trust between HMRC and taxpayers and their agents and a lack of faith in the R&D tax relief regime being able to deliver for SMEs. The current approach is discouraging legitimate claims from SMEs, which is undermining the policy intention of encouraging R&D.”
“We, and our members, want bad R&D claims rooted out, but as it stands, it seems that HMRC do not have the systems in place to differentiate good from bad. Too many genuine claimants are embroiled in a rigid and uncompromising compliance process in order to defend their R&D tax relief claim, and are reconsidering using the scheme altogether as the costs of enquiry outweigh the benefits of claiming the relief.”