Beware HMRC's New Approach to R&D Tax Credits Enquiries

HMRC's new approach to R&D Tax Credits enquiries has had a significant impact causing anxiety amongst businesses and advisors alike.

Targeted Enquiries

HMRC has started to implement their stated intention to target businesses based on their SIC code and claim size. Advisors report receiving multiple enquiries into R&D claims using templated letters that largely ignore any supporting narrative which has already been submitted along with the original claim. Even more worryingly, HMRC's attitude during enquiries has become much more aggressive Their starting position seems to be that none of the R&D originally claimed for actually qualified for relief.

Standardised Arguments

Moreover, HMRC's reasons for rejecting claims have become standardised. This is a significant change to their usual approach, which was more case-specific. Many R&D advisors have been shaken by HMRC challenging claims that were previously considered solid. HMRC is clearly looking for reasons to deny relief as quickly as possible.

Common justifications for HMRC's denial of relief include:

• The project was commercial, rather than technological.
• There was no evidence of project occurrence.
• Little or no use of Competent Professionals.
• The advance had been achieved before by other companies.
• The advance was for the company and not the industry as a whole.
• Claimed uncertainties could have been resolved in a readily deducible way.

Reasons for the New Approach

One reason for HMRC's new approach will certainly be the negative press it has received lately highlighting abuses of the R&D scheme. In particular, there have been a number of high-profile cases where R&D tax credits have been claimed fraudulently. This has put HMRC under pressure to take action to crack down on abuse of the scheme.

Additional information form required to be submitted in advance of a claim

From 1 August 2023, businesses must submit an additional information form to HMRC (in essence pre-approval that the claim meets the definition of R&D) outlining in detail the following:

• Qualifying Expenditure details
• Indirect qualifying activities
• Project details and descriptions
• What is the main field of science or technology
• What was the baseline level of science or technology that the company planned to advance
• What advance scientific or technological knowledge did the business aim to achieve
• How did your project seek to overcome these uncertainties

What Companies Can Do

There are a number of actions that businesses can take to protect themselves from HMRC's new approach to R&D Tax Credits enquiries. These include:

• Making sure that their R&D claims are well-founded and supported by evidence
• Using a reputable R&D tax credit advisor, preferably a firm of Chartered Accountants
• Keeping good records of all R&D activity
• Being prepared to defend claims if they are challenged by HMRC.

Conclusion

HMRC's new robust and aggressive approach to R&D Tax Credits enquiries is a significant development that will have a major impact. Businesses need to be aware of the new approach and take steps to protect themselves from a potential HMRC enquiry.

What to do if you receive a letter from HMRC querying your R&D claim

If you have received a “nudge letter” from HMRC regarding your R&D claim, do not choose to ignore it. It does not necessarily mean that you have done anything wrong with your claim. Take it as an opportunity to check that you are fully compliant.

If you prepared and submitted the R&D claim yourself, do not hesitate to reach out to us here at Friend Partnership.

If your claim was prepared and submitted by a R&D tax advisor, discuss the letter and the claim with your current advisor, who may be able to assist, provide reassurance or amend the claim. If you are not satisfied with their answers, again, please do not hesitate to reach out to us.