The boom in R&D tax credit claims has led to greater policing of submissions by HMRC. James Dudbridge, Associate Director at ForrestBrown, explains how to navigate an enquiry.
Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They’re a valuable source of cash for businesses and support significant growth.
HMRC itself found that for every £1 of tax foregone, up to £2.35 of additional R&D is stimulated[i]. As a result of an increasing awareness of these incentives, the volume of claims has boomed in recent years. Around 50,000 claims were made for the 2017-18 tax year alone – a 31 per cent increase on the prior year[ii].
This success has prompted greater scrutiny of the submissions being made in the form of enquiries. Put simply, a taxpayer may receive a letter worded as a “compliance check” from HMRC asking for further information relating to their claim. In reality, it’s an investigation, and should be treated with the gravity it deserves.
While HMRC doesn’t release data about the volume of enquiries it undertakes, estimates suggest it’s about 5-10% of all claims submitted[iii]. These can be prompted by any number of factors from an inspector spotting an honest mistake to questions about a firm’s wider tax position.
With more enquiries being launched than ever before, it’s important to be prepared. Most enquiries take place before any money is handed over. However, when they occur after the credit has been paid you may have to hand back cash that has already been spent and moreover, interest may be charged. In all cases there is the possibility of penalties applying if any part of the original claim is found to be incorrect.
But it’s not just the financial impact. If an enquiry isn’t handled effectively, it can seriously impact your relationship with the tax authority making subsequent tax issues harder to deal with. Furthermore, an enquiry can take anything from a few months up to several years to resolve. That’s time and resource being spent trying to fix the issue.
Avoiding an enquiry
All this begs the question: how can you avoid being the subject of these types of investigation? In some cases, you can’t, you may be chosen at random. But you can reduce the likelihood and increase your chances of a successful resolution.
Firstly, be prepared. The same level of scrutiny should be given each year when making a claim – and if it transpires previous documents weren’t quite right, action needs to be taken. Simply updating documentation from your prior year isn’t enough.
Secondly, it’s vital that those preparing the paperwork are crystal clear on the criteria. Worryingly, some aren’t. Once we outline to them exactly what can go into a submission, they realise they’ve been getting it wrong. In most cases, it’s not intentional.
There’s also a need to have a strong understanding of the underlying science or technology, which can be a challenge where a finance team prepares a submission. HMRC will want to see this presented in a particular way. There are then strict categories of costs involved which can be included in the claim.
Top tips for handling an enquiry
If an enquiry happens, you need to act swiftly and judiciously. Be open, be honest, be transparent and be collaborative. It’s important to begin building a positive relationship with your HMRC inspector immediately.
Don’t be fooled by the initial generic questions. Think carefully about your claim and try to get ahead of any possible risk areas. Within reason, HMRC will be open to you defending parts of your claim that they may have challenged.
Don’t keep the enquiry away from people within the business. Getting the right information together for HMRC will usually involve a number of different stakeholders in the business, such as the legal team, the finance department and the technical experts.
It’s always worth bringing in specialist external support with a strong pedigree in dealing with enquiries. They can help guide you through choppy waters and provide expert advice on all aspects of the enquiry. When engaging with an enquiry support service, the first step is full disclosure. Don’t hold anything back and give them access to your experts for interview.
The next step is to revisit all the costs that made up the R&D tax credit claim and review them again in full. Once this is completed, you will have a strategy in place designed to resolve the enquiry. This will often involve formal written responses, as well as preparation of key personnel for any call or meeting required with HMRC.
A silver lining
Although enquiries aren’t necessarily positive experiences, we should welcome their existence. HMRC is enforcing best-practice and it is reassuring to know that public finances are being protected. Additionally having been the subject of an enquiry, those involved will be armed with the knowledge they need to ensure subsequent claims are robust.
If you haven’t made an R&D tax credit claim before and are considering it for the first time, it’s important not to be put off. That said, given HMRC’s focus on quality, it’s worth choosing an adviser with care. Look for a multidisciplinary team, seek evidence of supervision by the Chartered Institute of Taxation and be assured they adhere to HMRC’s agent strategy.
This will ensure that your claim is not only fully maximised, but also protected from risk. Meaning that when you receive your benefit, you can do with it what the government intended: invest it back into your business to spark your next big push or fund the start of something remarkable.
James Dudbridge leads ForrestBrown’s R&D tax credit enquiry service, which will step in to protect businesses and resolve the enquiry on their behalf.