Avoid HMRC enquiries on your R&D Claim

Making mistakes when claiming R&D Tax Relief can be costly, so it’s important to take care when submitting your claim. To help you make sure that your claim is robust, and to steer you clear of common errors, we’ve put together our advice on avoiding HMRC enquiries on eligible R&D claims.

The R&D Tax Credits Scheme

Born in the year 2000, the R&D Tax Credits scheme has proven itself to be a vital additional revenue stream for thousands of businesses across the UK – from construction firms that are developing more sustainable housing, to software companies creating an ever more automated world.

There is no denying that the R&D scheme is a highly important source of revenue for forward-thinking, innovative businesses, however the last few years have been a difficult time for research and development in the UK. According to HMRC’s latest statistics, UK businesses claimed 6.6 billion of R&D Tax Relief support for 2020 to 2021 – a decrease of 4% from the previous year.

You can learn more about the latest HMRC stats by reading our white paper on R&D Tax Credits Statistics 2022: What They Say About The Health Of UK R&D.

Government concern about fraudulent SME R&D claims

There is a growing concern about the amount of fraud under the SME R&D scheme, with high-profile cases of abuse reported in the Times. HMRC’s Annual Report and Accounts estimates that for 2021 to 2022, there has been a 4.9% level of fraud and error. The bogus claims largely came under the SME scheme, which had a 7.3% level of error and fraud compared to just 1.1% for the RDEC scheme. These errors and frauds were discovered through HMRC’s risk identification process, which can result in enquiries into R&D claims in an effort to tackle abuse of the tax relief scheme.

Due to the perceived threat of fraud, the UK Government has announced new measures to tackle abuse and improve compliance but these measures risk penalising genuine R&D Tax Relief claimants. You can find out more about the changes by reading our white paper on how R&D Tax Relief Is Changing.

What is an HMRC R&D enquiry?

An enquiry means that HMRC thinks an R&D Tax Relief claim is incorrect, and they will therefore seek to review the accuracy of the claim. It can be a drawn-out process, taking months (and sometimes years) to resolve.

When HMRC queries R&D claims, an officer from a specialist R&D Unit will discuss the claim with the business’s technical and scientific experts as well as management. HMRC will request the information required to confirm that the business is undertaking eligible research and development projects and claiming for the right costs.

Enquiries typically delay payment of R&D Tax Credits but HMRC keep this under review and may make interim payments as the enquiry progresses.

For further reading, HMRC has published the full conduct of enquires.

Can an HMRC R&D enquiry happen after an R&D Tax Claim has been processed?

Yes, HMRC R&D enquiries can take place after claims have been processed. HMRC states that they may still enquire into R&D claims within the statutory time limit.

Enquiries will check that the companies are in receipt of the correct amount of R&D Tax Relief and that they have paid the right amount of tax.

Has anyone ever been prosecuted for fraudulent R&D Tax Credits claims?

In November 2020, three men were jailed for a bogus £29.5m R&D Tax Relief claim. The perpetrators used a registered company, Clinical Information Systems Ltd, to claim the relief on a fake IT healthcare system on which they attempted to claim £137m worth of R&D expenditure on. After submitting the claim, the men were asked for supporting evidence that the claim was in fact legitimate, and having failed to provide this, they were subsequently jailed.

At the time, HMRC published the following statement: “This wasn’t research and development, it was out and out fraud. HMRC will continue to create a level playing field for law abiding businesses by rooting out the minority who seek to abuse these schemes, as this result clearly shows.”

More recently, in October 2022, eight people were arrested on suspicion of conspiring to submit more than 100 fraudulent R&D Tax Relief claims. HMRC released a statement that said: “The arrests include a tax agent suspected of criminally facilitating the fraudulent attack. More arrests are expected in the coming days. By acting quickly to pause payments and implement additional checks on claims, we’ve protected £46m of public money.”

What does increased scrutiny on R&D claims mean for my business?

It is now more important than ever to ensure that your claim is fully compliant and will stand up to HMRC’s scrutiny in the event of an enquiry. Businesses claiming R&D should be aware that, as a direct reaction to the recent influx of fraudulent claims, HMRC hired an additional 100 inspectors, whose exclusive focus is on reviewing R&D Tax Credit claims.

The echelon of what is considered a compliant claim has increased, and HMRC reviews the technical report pages of each claim with a fine toothcomb to ensure every claim it is legitimate. Even claims which are legitimate, but lack sufficient information or evidence to showcase why the nature of the work is entitled to a specific benefit, may raise the eyebrows of the inspector and result in an enquiry. Furthermore, if there is no evidence to rebut the inspector’s queries following an investigation, this can result in penalties.

How many companies face R&D HMRC enquiries?

Since April 2022, HMRC has asked more than 1,600 claimants for extra information as part of an enquiry to validate their R&D relief claim. More than 80% of these have not been paid out as a result of HMRC’s checks.

What are the penalties for mistakes arising from an HMRC enquiry?

Penalties can be extremely harsh, however they are relative to the level of negligence or fraud which is identified. The penalties tend to average around the 15-30% mark in terms of lost tax relief if there has been a ‘careless’ mistake. If a “deliberate” mistake has been made, a business will be looking at a 30-70% in lost tax and this could rise to 70-100% if the HMRC identifies a “deliberate” mistake with concealment – essentially a fraudulent claim.

Let’s say your claim value is £50,000 and you receive a penalty based on a ‘careless’ mistake, you will receive a penalty of £7,500 to £15,000. Furthermore, the interest on the penalty is 3% per annum if not paid. If the mistake were ‘deliberate’, up to the full £50,000 can be fined. It is therefore crucial that a business receives the best advice around their R&D claim, in order to both avoid hefty penalties and the time investment required to challenge an HMRC enquiry.

What are the most common mistakes made during R&D Tax Credit claims?

HMRC have published a list of common errors made during R&D Tax Relief claims. Example errors include:

What should a business look for when looking for an R&D Tax Credit specialist?

Approximately 250 registered UK businesses now offer “specialist” R&D Tax Credit support services for companies looking to claim on the scheme. The vast majority of these have entered the market within the past five years. You are most likely thinking; what accreditation do these companies need to have to operate? The answer, surprisingly, is none.

Any one person can set up an R&D Tax Credit consultancy currently and claim to be a quote-unquote specialist. This means they can offer complex financial advice on putting together a claim for any business with zero actual accreditation. There are of course a good number of consultancies that have strong and robust processes and are true specialists; it is important, however, that businesses are aware that the industry has become diluted with companies which apparently offer large payouts coupled with low fees which is a testament to their “specialist services”. Ever lower fees tend to be a giveaway as they reflect the level of time and resources invested by the “specialist” and these firms see a far higher level of HMRC enquiries than the long-standing R&D providers.

There are three fundamental factors to take into consideration when selecting an R&D specialist.

Providing those three fundamentals are strong, the value of the claim will almost always be maximised, whilst ensuring there won’t be any challenge from HMRC.

Technical Expertise

Any business can claim R&D as long as its projects meet the following criteria:

The difficulty with this criteria is that it is incredibly broad and can potentially be interpreted differently from industry to industry.

For that reason, it is important that the claimant company uses the services of an experienced R&D provider, which employs competent professionals with the relevant industry knowledge to compile a technical report. Failure to do so may result in substandard claim submission, with little to no evidence that the R&D activity detailed actually met the criteria of the scheme.

Compliance

With the ever-increasing levels of scrutiny from HMRC, it is more important than ever that your R&D provider can offer a robust defence strategy in the event of an enquiry. If HMRC does raise an enquiry and your provider has not have a suitable defence process in place, you/your business will be liable to respond to HMRC with all the supporting evidence – and it is a complex and time consuming process. On the other hand, if you select an R&D expert who carries out the claim process with superior due-diligence, all evidence will already be in the best possible shape, resulting in a smooth and speedy resolution to any enquiry.

Efficient Processes

The importance of reducing the amount of time spent by a company on their claim goes without saying. Applying for an R&D Tax Credit claim showcases the level of innovation undertaken by a business, as well as the amount of time they have invested in their projects and will continue to invest. Any provider must be able to offer both the technical and tax expertise necessary to streamline the claim process for their clients as much as possible and minimise the amount of time expected by them and their internal teams.

What if my business is already facing an HMRC R&D enquiry?

HMRC can open enquiries into legitimate R&D claims if they haven’t been submitted correctly, which is why working with experienced tax relief experts can pay dividends.

At Leyton, we offer an HMRC Enquiry Defence Service for R&D Claims. Our tax and technical experts will review the enquiry and give an honest assessment of the likelihood of a successful defence. We have a close working relationship of working with HMRC, and have a track record of putting together robust responses to enquiries – even for complex and technically challenging disputes.

If your business has any questions about an HMRC enquiry, please get in touch.

Insights from Ross Howarth, Business Development Manager, Leyton UK