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Don’t Panic! HMRC tax enquiries should be expected

Date: March 16, 2022

If you’re worried about HMRC launching an enquiry into your R&D tax relief claim… you’re with the wrong adviser.

 

Tax enquiries are a fact of life and are to be expected.

 

HMRC is believed to carry out thousands of reviews a year into R&D claims, some cursory and others more lengthy.

 

But if your adviser or accountant has done their job properly, it’s a formality. Enquiries are one of the ways the government tackles abuse of this tax break and officials are naturally interested in the various ways the scheme is benefitting companies. This helps them advise on future policy and defeat fraud.

 

The secret to producing robust claims that will fly through an inspection is to include enough detail in the reports that accompany them. You should aim to leave a caseworker in no doubt that it contains only legitimate qualifying costs.

 

An HMRC official will want to see three things spelled out as clear as day:

 

• where the technological advances and technical uncertainties lie
• the identity and background of the claimant ‘competent professional’ (i.e the staff member with the most expertise)
• a breakdown of the qualifying costs

 

Caseworkers, including the 100 that were hired relatively recently to boost HMRC’s compliance activity, are less interested in functionality. What they’re really focused on is how the qualifying costs dovetail with the legislation. In other words, a new product could be the best thing since sliced bread but it doesn’t necessarily mean any R&D took place during its development. The project may not qualify for tax relief even if the product is ‘new’.

 

So frequent are mistakes that HMRC even publishes a list of the most common. They include not applying rules on connected parties, claiming under the wrong scheme (SME or Research & Development Expenditure Credit (RDEC) for larger companies), not allowing for grants and subsidies, and assuming subcontracted workers can be included. The myriad rules are complex and HMRC is right to review claims.

 

Remember — HMRC wants businesses to use the tax relief scheme and feel the maximum benefit. But it has to be within the rules.

 

So what can you do to prepare for your next tax enquiry?

 

1. Keep proper records of expenditure related to R&D projects and then take an interest in the claim. Read the claim from start to finish, and satisfy yourself that your accountant or tax adviser is including all the information you would expect to see should there be a review by an HMRC caseworker.

 

2. Understand the background and experience of your adviser. Their expertise is crucial. How long have they been working in the industry? Ask them for relevant testimonials, about the sectors they have claimed in, the size of their team and links to professional bodies.

 

3. Choose an accountancy firm or specialist tax adviser who will support you when an enquiry is launched at no extra cost. Some R&D tax relief consultants won’t handle investigations and others charge extra. A reputable adviser will work with you to answer any questions. Deal with them as quickly and politely as possible, and the HMRC caseworker will simply move onto the next enquiry once they’re satisfied the claim is legitimate.

 

4. Don’t be alarmed when HMRC mentions penalties. It is common for caseworkers to raise the prospect that penalties could apply when there’s a possibility a claim will be reduced. It does not automatically follow that a penalty will be levied.