Navigating R&D Tax enquiries: Understanding HMRC’s shifting approach

The landscape surrounding R&D tax claims in the UK is evolving, marked by a notable increase in enquiries initiated by HMRC. This article aims to provide an overview of HMRC’s approach and offer guidance on how we can assist clients in managing these enquiries effectively.

R&D in the UK

The UK’s R&D relief schemes offer substantial tax credits to both SMEs and large corporations. Recent HMRC statistics reveal a significant rise in R&D claims, with 90,315 claims amounting to £7.6 billion in relief for the fiscal year 2021/22. However, alongside this growth, concerns regarding fraud and abuse, particularly within the SME sector, have emerged. Reports of dubious claims have prompted HMRC to take action, with an estimated 16.7% (£1.13 billion) error and fraud rate recorded for the fiscal year 2020/21, with SME schemes experiencing a particularly high level of 24%. Previously HMRC estimated the level of fraud and error to be £336m, so HMRC estimate is now three times as large as it was previously.

In response to these concerns, HMRC announced policy changes aimed at addressing fraud and abuse, including:

• Reduction of cash credit rates available to SMEs, effective from 1 April 2023.
• Reintroduction of a PAYE/NI cap for SMEs claiming cash credits.
• Implementation of mandatory documentation requirements for R&D activities and advance notification for claim submissions, effective from specific dates.

Operational changes within HMRC

In addition to policy changes, HMRC has implemented operational adjustments to enhance compliance among claimants:

• Increased deployment of R&D inspectors to tackle non-compliance.
• Establishment of a dedicated “volumes” team within the Individuals and Small Business Compliance (ISBC) directorate to target SME enquiries, including a Mandatory Random Enquiry Programme (MREP).
• Issuance of thematic letters to companies targeting sectors prone to fraudulent practices.

Implications

These changes have resulted in a notable increase in R&D enquiries. HMRC are now checking over 20% of claims compared with 1% of claims previously. This over twenty times more than they did previously and therefore the risk of enquiry is significantly higher than previously.

Notably, the ISBC team has adopted a new approach to checking compliance, characterised by the issuance of enquiry letters without named caseworkers, limited correspondence opportunities, and a tendency to close cases prematurely. Consequently, rejected claims often lead to penalty assessments and appeals, contributing to a growing backlog of cases.

HMRC’s response

Recognising concerns raised by industry stakeholders, HMRC has acknowledged the need for improvement and has initiated internal process reviews and training programs for caseworkers.

How we can help

Our Corporate Tax and Tax Disputes Departments synergise their expertise to deliver tailored solutions for clients navigating R&D tax enquiries. Offering a full spectrum of services from enquiry resolution to litigation, our multidisciplinary team excels in R&D tax relief claims, ensuring strict adherence to regulatory standards.

We also have a Tax Investigation Service that covers R&D claims prepared by our firm. We strongly recommend that this service is taken out for all R&D claims as it should cover the cost of tax enquiry.

As HMRC intensifies its scrutiny of R&D claims, it becomes imperative for businesses to maintain meticulous documentation and compliance. Leveraging expert support and adopting transparent communication strategies can mitigate risks associated with HMRC enquiries, safeguarding the integrity of R&D claims. Please contact us for assistance with R&D enquiries, and our team can discuss your situation and circumstances in more detail.