We have asked one of our resident tax experts, Gary Craig, questions relating to changes in HMRC’s policies that are currently affecting Research and Development Tax Credit claims.
We talk about ensuring accuracy of claims submitted, documenting Research and Development activities and what actions to take in the event of an enquiry.
Gary has some valuable insights to share from his time working for HMRC.
BY WAY OF INTRODUCTION, COULD YOU PROVIDE YOUR BACKGROUND FOR THE READERS
Certainly! My career began as a qualified aerospace engineer working for 10 years in that industry but moving across to HMRC where I accumulated over 21 years of service. During my tenure, I have held several roles, including leading national compliance activities and program management.
From 2019 to 2022, I served as Programme Management Office Lead, orchestrating a national program aimed at reducing the tax gap through over 50,000 forensic compliance checks annually. This role involved strategic oversight of complex tax disputes and the development of HMRC’s Agent Compliance Operational Strategy.
WHAT ARE YOUR VIEWS ON HOW THE RESEARCH AND DEVELOPMENT TAX CREDIT SECTOR HAS OPERATED FROM A CLAIMANT POINT OF VIEW?
From my perspective, the sector has faced significant challenges, which are well publicised both in terms of the quality of the claimants and the claims themselves.
The variance in submission quality has historically been problematic, leading to significant payouts for non-qualifying activities.
Any unregulated sector handling large amounts of taxpayers’ money is always going to be challenging to administer so in my view it was when, not if, HMRC took steps to address this.
WHAT HAVE YOU SEEN AS HMRC’S HISTORIC COMPLIANCE APPROACH?
Historically, HMRC lacked the manpower to adequately review submissions something that has been tackled by the recent investment in the current campaign team. In terms of their approach, I don’t think what they view as R&D has changed significantly albeit used to be easier to discuss the R&D key points directly.
It always frustrates me and makes me laugh me when I hear new clients say why are you asking for this level of detail our claims always went through before. It is an education point for clients to guide them that their previous claims probably went through due to lack of review rather than them passing any HMRC review with flying colours.
It is a bit like asking a police officer who has stopped you for speeding why no one stopped you for speeding last week. It wasn’t legal last week either, you were just not caught!
IN YOUR VIEW, WHY DID HMRC CHANGE THEIR APPROACH?
The shift in HMRC’s approach was driven by several factors: the significant level of fraud and errors which contributed to the tax gap, the failure to have their accounts signed off, and increasing public and governmental pressure to enhance the integrity of the tax system.
HOW HAVE YOU OBSERVED THIS APPROACH CHANGE OVER THE PAST 24 MONTHS?
The main change most claimants will have noticed in the ISBC approach is that all interaction with HMRC is only via written submission. As such it is so much more important to adequately convey the R&D activities as poor reports could previously have been overcome with a meeting with HMRC where this is more difficult now.
The increases in man power have resulted in more compliance checks being opened while also targeting areas where there have been historic links to error which again places demonstrates the need for a clear and concise report.
This funding aims to enable HMRC to complete compliance activity on 20% of claims which we understand they are on target to achieve.
While most regulated advisors have long since realised that this needed to happen the challenge is the fact that initial correspondence is not with an inspector while can elongate the process and frustrate those inexperienced in dealing with HMRC.
WHAT DOES THIS MEAN FOR A COMPANY THINKING ABOUT CLAIMING R&D TAX CREDITS?
Companies should carefully consider the R&D guidance to ensure that the project activity qualifies for R&D tax credits. I would recommend that companies seek professional assistance from a qualified, regulated and reputable business. This is of particular importance for audited companies where the R&D tax credit is a material balance or for businesses hoping to go through a sale process.
We have recently taken on clients where audits could not be signed off due to concern about the quality of the report associated with the asset on the balance sheet. Similarly, we have recently been taken on by a number of funds as a result of issues being raised during the due diligence process as a result of tax warranties, again due to the quality of the R&D tax credit claim. We are quite lucky in that respect as we have a team with experience across HMRC and Private Equity (both from a deal and tax side) so we can usually navigate all concerns.
ARE THERE ANY KEY INDUSTRIES THAT YOU SEE HMRC FOCUSING ON?
I don’t think there is any point in focusing on the industries that should never have been doing this in terms of retail, care homes and hospitality, they are obvious. Given how aggressively some construction and software claims have been historically they are getting particular attention. It is important to point out that if you are in software and construction and you have a valid claim there is no issue with doing this. What I would make a point of saying is that you need to be clear on your R&D cost allocation and carefully consider the boundaries of each R&D project.
WHAT ARE THE TYPICAL ISSUES RAISED BY HMRC IN AN ENQUIRY?
Typical issues in an enquiry start with verifying the sufficiency of the information provided to support the R&D claim. It’s crucial that your initial submission includes a comprehensive report detailing the R&D activity, establishing the baseline, and the advancements in science and/or technology.
Please do your homework to pre-empt HMRC’s questions.
Having experience of HMRC’s compliance checks really helps with shaping your report. I don’t mean that you try to make something sound different to reality, but that you understand what information HMRC actually want and you provide that in the first instance rather than having to go through an enquiry, correspondence, stress and wasted time when you could get the right result straight off the bat.
SO A LETTER ARRIVES FROM HMRC, INITIALLY REJECTING YOUR R&D SUBMISSION, WHAT SHOULD YOU ABSOLUTELY NOT DO?
Firstly, do not ignore the letter. Such correspondence often includes potential penalties and requires prompt attention. It’s essential to carefully review HMRC’s queries and respond appropriately.
Please speak to an appropriately qualified advisor at this point.
Unfortunately, all too often people believe that they are experts and start sending letters to HMRC inadvertently confirming to HMRC that they do not qualify for R&D Tax Credits at all!
IF THE COMPANY IS FOCUSING ON R&D, COULD THE ENQUIRY BE EXTENDED TO OTHER TAXES IN THE COMPANY AND THE DIRECTORS?
While it’s uncommon, if an R&D enquiry uncovers other potential tax risks, HMRC may extend their investigation to cover these areas. This possibility further underscores the importance of ensuring that all aspects of your tax affairs are in order.
OK, SO WE HAVE MANAGED TO MITIGATE THE PENALTIES BUT THE CLAIM IS STILL REJECTED, CAN I JUST WITHDRAW MY SUBMISSION AND GO AGAIN NEXT YEAR?
Once a claim has been made and an enquiry initiated, withdrawing it is not an option. However, you can agree that the claim was not allowable and allow HMRC to amend your return accordingly.
If the claim is rejected, you have the right to appeal the decision or request an independent review.
IF HMRC HAVE ALREADY PAID AND THE REJECTION OF THE CLAIM COULD THREATEN THE COMPANY’S SOLVENCY, WHAT CONSIDERATIONS SHOULD YOU HAVE?
If facing potential insolvency due to a rejected claim, it’s crucial to consider appealing HMRC’s decision or requesting a postponement of tax collection.
If all appeals are exhausted or not pursued, you may need to negotiate a time-to-pay arrangement or seek professional insolvency advice.
Again, sorry to reiterate and sound like a broken record but this is definitely time to speak to an appropriately qualified advisor.
GIVEN ALL OF THESE CHANGES, ARE HMRC AND THE GOVERNMENT JUST TRYING TO DISCOURAGE ME FROM SUBMITTING AN R&D TAX CREDIT CLAIM?
Not at all. The government and HMRC continue to encourage legitimate R&D claims. Unfortunately, some legitimate claims are going to get hit in the crossfire as the government tries to correct its position.
OK THANKS GARY, IN SUMMARY, IF YOU WERE TO PROVIDE 3 KEY PIECES OF ADVICE TO THE READERS, WHAT WOULD THEY BE?
Get Professional Advice Before Claiming: To ensure your activities qualify and your documentation is compliant, seek expert advice.
Document Thoroughly: Ensure your claim includes detailed information about your R&D activities, clearly showing how your project meets the qualifying criteria.
Engage Competent Professionals: Work with advisors who can clearly articulate the technological or scientific advancements your project has made, including detailed explanations and evidence to support your claim, as this will be crucial during HMRC’s assessment.
With these strategies, companies can navigate the complexities of R&D tax credits confidently, maximizing their potential benefits while minimizing compliance risks.
In current times, it has never been more important to work with trusted regulated tax experts. Our team of tax specialists and industry experts are best equipped to assist you with your claim. Enquiry support comes as standard with us, meaning if you are subject to an HMRC enquiry, we will defend your claim with no additional fee.
We service the whole of the UK, so no matter where you are located you can avail of our expert advice.
You can find more information on HMRC’s R&D Tax Relief Guidelines here.