HMRC was not meaningfully challenging the vast majority of claims prior to May 2022, but things have now changed.
This is in part due to the pressure that the government is putting on HMRC to save public expenditure in what they view as a ‘runaway scheme’ to stop the cost of tax credits for SMEs from doubling to £9bn by 2027.
Since then, HMRC has bulked up its compliance team, changed its approach, and is now challenging more claims than ever before.
Claims at the highest risk of being checked are those in the field of software, which HMRC believes makes up the bulk of ‘incorrect’ or spurious submissions. But more claims across the board are being checked.
Unfortunately, even companies undertaking compliant activity and meeting HMRC’s criteria for R&D tax relief are getting flagged up for investigation due to poorly filed claims.
So what actually happens in an enquiry?
What is an enquiry?
Compliance checks, more commonly known as enquiries, are opened when HMRC are not satisfied with the submitted information, seeking further information about the specifics of your R&D activity. The areas of concern could be focused on the financial aspects of the claim, the technical, or both.
Ultimately, if the work you’ve been doing and the expenditure you’ve claimed for is in line with HMRC’s criteria, then an enquiry is nothing to be worried about. It’s a deeper dive into your claim so the HMRC can understand and confirm that your project is aiding R&D and that what you’ve submitted is truthful.
If not handled properly, enquiries can go on for months and result in rejected claims, a reduction, or even penalties.
Possible reasons for an enquiry 🚩
HMRC will never disclose exactly what triggered the enquiry, and in some cases, there is nothing specific.
Recently HMRC introduced an “R&D tax reliefs Mandatory Random Enquiry Programme” (MREP) targeted specifically at SMEs, meaning that any claim can get flagged up for an enquiry at random.
However, from experience, Claimer’s team know that the following are risk factors:
- A large increase in R&D spending from year to year.
- All or a large proportion of the expenditure from subcontracted R&D.
- R&D expenditure from the period forms the majority of overall expenditure, or inconsistencies between the report and information that HMRC holds (e.g. PAYE costs, filing dates).
- Missing or inconsistent supporting information and documents.
- A technical narrative that does not satisfy the tax inspector or an incorrect claim report methodology.
- Errors in the filing or amendment to the tax returns.
What happens during an enquiry?
- You get a ‘compliance check opening notice’ letter.
The content of this letter explains what the check is about and on what legislative grounds they have opened it, along with a request for specific information and documentation relating to the R&D claim.
There are usually around 20 questions covering the R&D activities, the qualifying expenditure, and other evidence, such as commercial contracts and grant documentation.
You will usually get 30 days from the date of the letter in which to prepare, write and send off your response, along with the relevant supporting documents.
- Write and send your response before the deadline.
To ensure the enquiry is dealt with swiftly and is resolved successfully, you need to provide thorough answers. These need to be succinct – writing waffle will only derail and prolong the enquiry.
If you haven’t already done so in the original report, you should clearly explain how the claimed R&D expenditure or underpinning activity is in line with the legislation. It helps if you reference relevant aspects of HMRC’s CIRD or the BEIS guidelines to support your evidence.
Ensure the success of your response by providing the following:
- A deep understanding of the field of science/technology that the claimed advance is in and how the project in question advances this field in a non-trivial way.
- Knowledge and experience of how the BEIS guidelines apply to real-world projects and how to communicate this with HMRC’s compliance case workers and their internal technical consultants.
- Knowledge and experience of corporation tax legislation and how and where it applies to a company’s expenditure.
If you’re not supported by an advisor that has a full grasp of the above, it pays to find one that does.
- Likely follow-up and involvement of Chief Digital and Information Office (CDIO) representatives.
After the initial compliance check letter, each response can take 4-8 weeks, depending on how busy the caseworkers are. Best case scenario, this may be a letter to confirm that the enquiry has concluded if they’re satisfied with your answers. But in practice, we rarely see this, even with expertly crafted replies.
More often, they follow up with more specific questions based on the information you supplied.
For software claims, they usually bring in expert representatives from CDIO (HMRC’s IT department). These representatives are usually very experienced software engineers that will often question low-level technical aspects of your claim.
At this stage, they may suggest a phone call interview. Be wary of this: the call is recorded, and they will be scrutinising everything said on and after the call.
If this is handled well, it can lead to a speedy resolution. But if otherwise, the chances of your claim being accepted will lessen significantly.
After the call, a back-and-forth will continue until HMRC are ready to make its decision.
Once HMRC is ready, they will write to you with their decision.
If you’ve been successful, they will confirm that they are satisfied and close the enquiry.
But if unsuccessful, the caseworker will explain which of the projects have been disqualified and why, reducing the claim size. They could also decide to reject it altogether.
At this point, you can either accept their findings or appeal, with a chance to overturn the decision. If you decide to appeal and your claim has not yet been paid, it will delay the processing and payment even further.
How long does an R&D enquiry take?
The process usually takes several months to resolve, depending on the strength and complexity of the claim and the quality of the responses.
It can take time for you or your advisor to put the relevant paperwork together, and each response by HMRC takes 4-8 weeks, depending on how busy they are.
Additionally, the length of enquiries is increasing as HMRC continues to crack down on fraudulent claims.
Possible outcomes of an enquiry
✅ HMRC accepts your case and closes the enquiry.
✅ HMRC reduces the size of the claim, charging you interest on the amount reduced amount.
❌ HMRC rejects the claim, requiring any tax credit or refund to be returned with interest.
❌ HMRC applies a penalty for the claim being inaccurately or carelessly filed.
❌ HMRC open a fraud investigation.
The value of your claim is almost never worth a long-winded and stressful battle with HMRC, especially for a fledgling startup or scaleup.
As such, it makes sense that you outsource your claim to an experienced R&D tax specialist with both tax and technical experience in your field.
However, the industry is unregulated, and almost all accountants and specialists do not have this experience, which is a key reason Claimer exists.
If you’d like to learn more about how we can take the hassle, risk, and high fees out of making R&D claims, drop us a line here.
👋 If you’re interested in talking to an expert at Claimer about what you can claim, chat with us using the live chat (bottom right) or pop us an email. Or, if you’re ready, you could get started with your claim right away.
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