You’ve worked tirelessly innovating and investing in R&D. You’ve partnered with an adviser, submitted your claim, and are expecting the benefit from the scheme. But now, HMRC has opened an enquiry to investigate your activity.
For many businesses, this can leave them unsure of the next steps. Do you persevere with your current adviser or consider a change? The answer often depends on your adviser’s expertise and how they handle the enquiry process. There are specific actions that they should be taking to support your business and several red flags that indicate it might be time to seek a new adviser.
Why do enquiries happen?
Enquiries are becoming more common, with approximately 20% of R&D tax relief claims facing investigation. This is part of HMRC’s wider effort to reduce non-compliance, which has cost the government hundreds of millions of pounds. HMRC’s goal is to ensure claims meet the criteria for R&D tax relief and to tackle error and fraud. There are many reasons why HMRC may instigate enquiries, here are the most common reasons:
- Random sampling (Mandatory Random Enquiry Programme) : This is obviously unavoidable, as your business might be selected purely by chance. HMRC do this to better understand the general compliance levels and identify any new trends that might be occurring in the industry.
- Financial discrepancies : The income reported on your tax return might not match the figures reported by your bank. Or your business expenses vary significantly from the average in your industry. These are common discrepancies that could cause HMRC to raise an enquiry.
- Sudden increase in claim size: If a business claims several times the R&D expenditure it did the year before, it can indicate a potential error or pushing the boundaries of what’s permitted. However, this could also result from underclaiming in prior years.
- Poor record-keeping: Poor-record keeping prompts an HMRC enquiry only if they are already investigating something else and decide they want to do a full compliance check, as opposed to an aspect compliance check.
So should I switch, or stick?
Just because your claim has triggered an enquiry, it doesn’t necessarily mean you should change adviser. Random checks happen and they don’t reflect the quality of your claim. However, there are clear signs that your adviser is proactive, even before the claim is submitted. A well-prepared report anticipates the common reasons HMRC might open an enquiry, so it’s important your report addresses these potential issues before it reaches HMRC. A competent adviser should have a dedicated enquiry team that will:
- Minimise business disruption – By managing the enquiry process on your behalf, your team can stay focused on running the business.
- Offer expert industry knowledge – They should have a proven process to defend your claim and minimises reputational risk during HMRC enquiries. A good adviser will also have the data to support their approach. For example, asking how much benefit their enquiry team resolved with HMRC in the previous year can provide an insight into their experience and ability.
- Manage full enquiry management – They’ll handle every step of the process, from organising teleconferences with HMRC on your behalf to managing all written correspondence.
- Stay up to date – Adapting strategies to keep pace with HMRC’s ever changing approach leads to a more efficient enquiry resolution process. It’s easy for companies to fall behind on the latest legislation, so make sure they stay current.
- Produce exceptional R&D reports – Traditional reports using fail to address key questions raised by HMRC during compliance checks. Some advisers have realised this and redesigned their report writing process. Check to see if your adviser designs their reports to proactively answer potential enquiry questions from HMRC.
Why you should switch
It’s common for a company to seek a new adviser for an enquiry, especially if the original adviser is implicated in the error or doesn’t have a strong defence record. If you have doubts about your current adviser, some key red flags to watch for include:
- Charging extra for enquiry defence – A competent adviser won’t charge extra to defend an enquiry if they prepared the claim.
- No dedicated team – Many advisers have ad hoc enquiry teams, which can result in a lack of specific knowledge and industry experience. Ensure your adviser has a devoted team, as this can significantly speed up the enquiry resolution process.
- A poor relationship with HRMC – A good adviser will relish the chance to engage with HMRC, proving that their client’s R&D claim is legitimate. They should be professional, transparent and proactive and foster a strong working relationship with HMRC enabling them to resolve enquiries swiftly and effectively. If your adviser is reluctant to contact HMRC and would rather you do it on their behalf, this indicates there might be a fractured relationship.
Keep Your Business Running Smoothly
An enquiry can be a daunting prospect for any business which is why having the right support is essential. Without this, enquiries can drag on, drain time and resources and prevent businesses from claiming the R&D tax credits they are rightly entitled to.
Use the following points to assess your current adviser, or as a checklist when choosing a new R&D specialist to partner with. If you’re looking for an adviser to defend your enquiry, identifying these key points should be a top priority to keep your business running smoothly.
