What triggers R&D tax credit investigation?
For corporations, tax enquiries may be particularly stressful. HMRC would regard applications for R&D tax credits made without supporting evidence as dangerous, which is why our team often submits to HMRC a comprehensive R&D report with a thorough breakdown of the costs involved in the application.
Any large first time R&D claim is likely to be reviewed at HMRC and has the potential to be enquired into. This could also lead to larger full tax enquiries into the company if they are not satisfied with the information that has been supplied.
What is an HMRC enquiry?
The UK government launched an R&D tax credit scheme in the year 2000 as an incentive for businesses to invest in development and innovation. Over the years it has helped to boost the UK economy whilst rewarding companies with credits to reduce their Corporation Tax liabilities. HMRC administers and manages these R&D tax credit incentives and sometimes this can lead to an enquiry.
HMRC usually processes R&D tax credit claims very swiftly and they aim to work to a deadline of 28days. In the majority of cases, it is simply a paper exercise where an application is reviewed, submitted documents checked and the R&D tax credit claim processed. However, HMRC can request further information to answer and ask questions to clear up any issues- that is what is referred to as an enquiry.
What can make HMRC open an enquiry?
Every year HMRC will open enquires on a certain percentage of R&D tax credit claims as a matter of course. It is part of a verification mechanism to ensure that it operates equally and distributes the funds available for R&D tax benefits properly. The reasons for the tax enquiry may vary- it could be for something related to the business itself or a sudden reduction in profit for instance.
What are the common reasons for R&D tax credit investigation?
The most common reasons are:
- HMRC is carrying out a fact-finding exercise- likely because of a larger claim value having been submitted compared to the ones filed previously.
- HMRC is looking to focus on a certain sector type of technology to make sure all claims are consistent.
- HMRC believes there is an inconsistency and wants to check the credibility of a claim.
- HMRC has a question about the company’s tax return. It isn’t directly linked to R&D claim, it is looked at all together for completeness.
A company’s R&D tax credit claim must be as accurate and thorough as it possibly can be.
Main areas that are risky for R&D tax relief claims:
- A large R&D claim is submitted with no R&D report or a cost breakdown
- Improvements in science or technology are not adequately explained in the report.
- Directors using their own connected company to perform sub-contracted R&D
- Claiming all or most your staff are doing R&D is a risk- particularly if the company has revenue streams.
- Poor or inadequate methodology in calculating the qualifying R&D cost in the project.
How can HMRC enquiries be avoided?
When it comes to submitting an R&D tax credit, attention to detail and due diligence are essential. It is important that business owners can demonstrate a clear understanding of the guidelines in regard to R&D and have checked that their technical narrative supports this. Record-keeping measures should be also watertight as this will not only help to avoid problems now but in the future as well.
Claims that have been properly and carefully presented are far more likely to stand up to HMRC scrutiny-and indeed to then be paid. A robust narrative and strong methodology is the most effective way to reduce the likelihood of any penalties or deductions being imposed.
What are these penalties?
HMRC has right to disallow up to 100% of an R&D tax credit value if thinks a company is claiming dishonestly or it has deemed that the preparation process is negligent. Government funding is tight and protecting public purse is of paramount importance. Helpful co-operation and positive attitude will help put clients in a good light when it comes to deciding exactly what penalties to apply.
What to do if faced with an enquiry?
If the clients have received notification of an enquiry is to stay calm. The initial stage of an enquiry will be a request from HMRC for additional information about an applicant’s R&D tax credit claim. Accountants should help clients collect this information and liaise with HMRC on their behalf. Throughout the enquiry process, the client must take a diplomatic, professional and positive approach towards HMRC as their attitude can make a big difference to the eventual outcome.
Once the required information has been put together, accountants should help the client to formulate a response to the enquiry in writing. Often this is enough to resolve the issue with the HMRC being satisfied that the original application is correct.
What if the enquiry continues?
HMRC will write to them to explain the next steps and what they will need to do. Usually, this will involve a telephone call and/ or a meeting with their HMRC representative in person. Just because further investigations have been requested, it doesn’t mean the company is in trouble. It means that HMRC believes they should have the option of a negotiated settlement or, following further questioning, a number of discussions and meetings need to be scheduled until the resolution can be found.
The R&D tax relief scheme can be complex and using an R&D specialist will help you go through the legislation and whatever make claiming a daunting experience. Our team has already submitted hundreds of successful claims to HMRC and have a very high success rate in claims submitted.
Arrange your free consultation to discuss your R&D claim.