R&D tax claims are extremely valuable for businesses – particularly in recent years, with the COVID-19 pandemic and soaring inflation. For 2023 alone, however, HMRC estimates that the cost of erroneous and fraudulent claims exceeded £1billion. It's no surprise, then, that they're under increasing pressure to redouble efforts to address compliance and any abuses of the regime.
Receiving an enquiry letter from HMRC can be incredibly stressful, and providing the evidence to conclude it can be time-consuming and expensive. We've seen HMRC adopting an increasingly stringent approach, even towards businesses with a history of previously unchallenged claims. If you have concerns about a past R&D claim, or if an enquiry has already been opened, it's crucial to understand the best way to respond and reach a resolution swiftly.
Reviewing the accuracy of historic R&D claims
The R&D tax legislation is complicated and ever-changing, with a good deal of subjectivity involved in determining what is or isn’t ‘R&D for tax purposes’. It's therefore easy for claimants, who are, of course, taxpayers too, to make an error, or to reach a position that HMRC may challenge. This can lead to irregularities and penalties that cost your business.
Common errors include:
- whether a project ultimately constitutes qualifying R&D for tax purposes
- companies incorrectly claiming under the wrong R&D tax scheme
- a failure to consider the impact of third-party funding or customer agreements
- businesses claiming on costs which relate to R&D, but aren't within a qualifying category
If you have concerns, a review of historic claims may help provide peace of mind that no such errors or significant risk areas exist if HMRC do check your position. Unfortunately, mistakes can be made, whether it be through genuine error or receiving incorrect professional advice. Some businesses may also knowingly submit a claim that doesn't qualify. Equally, you may want to defend a claim that HMRC challenges. The question then becomes how to address their queries to ensure an optimal outcome.
What happens if an R&D claim is challenged or inaccurate?
Defending your position
You may be confident your claim can be defended, but are still faced with responding to an extensive list of questions in a short timeframe. The level of detail needed may also be far beyond what was prepared at the time of the initial claim, including requests for detail on all R&D projects. It's crucial to determine the ‘new’ information HMRC is requesting, what details are likely to be decisive in influencing their decision, and how to present any response to ensure the best chance of success. Proactive communication will be key.
Addressing inaccuracies
An R&D claim can be inaccurate for various reasons. The key is how you approach HMRC to resolve it and mitigate any liabilities. HMRC themselves expect claimants to come forward if they find any errors.
There may still be time to amend the original filing position, but, if not, a voluntary disclosure must be made to HMRC. This will generally be the quickest and most financially efficient way of resolving a historic error.
Funding your business to grow and evolve for the future
Learn more about how our Research and development tax incentives services can help you
How we can help
We know HMRC’s focus will remain on R&D tax claims, so if you do require support with your claim, you need a team who can provide guidance around claim potholes and changes to the regime. Our team includes advisers with vast experience of R&D tax claims and the current reform agenda, as well as former senior HMRC inspectors.
If any errors are identified we can leverage our experience and connections with HMRC to resolve it. Equally, we can support you when an enquiry has started, by pursuing a strategy that fits your budget and circumstances, and with the overall tax benefit in mind. In either case, the objective will be to conclude the matter as favourably as possible while maintaining positive relations with HMRC.
For more insight and guidance, get in touch with David Francis or Ian Rowland.
