Recent figures indicate a 26% drop in the number of claims submitted through the R&D relief scheme compared to the previous year. This trend follows a sharp rise in the rate of enquiries from HMRC into R&D claims, which has led businesses to become increasingly concerned about potential penalties associated with non-compliant claims, perceiving the scheme as a high-risk endeavour.
However, from reduced corporation tax bills to cash payments, there remain significant opportunities for companies that claim under the R&D scheme. This article will provide an in-depth look at how working with a reputable adviser, keeping accurate and up-to-date records, and a strong technical narrative can significantly reduce your chances of facing an enquiry.
What is an HMRC enquiry?
An enquiry is a formal investigation conducted by HMRC into R&D tax relief claims to determine whether a claim complies with the guidelines of the R&D Tax Relief scheme. During an enquiry, HMRC will interrogate areas of your claim to verify that eligible qualifying R&D activities took place during the financial period and that legitimate costs have been linked to these projects.
Evidently, the frequency of compliance checks has significantly increased from 1% prior to 2023 to roughly 17-20% as of the most recent period. So, what has sparked this increased scrutiny by HMRC?
Why enquire into claims?
HMRC’s published figures revealed an estimated £1.3 billion in errors and fraud claimed through the SME and RDEC scheme from 2021 to 2022, comprising an astounding 17.6% of overall claims. These findings increased political scrutiny from the Treasury and National Audit Office, highlighting concerns over the legitimacy of the overall scheme. These factors led HMRC to significantly increase its workforce to boost enquiry rates and restore confidence in the relief.
Following increased efforts to reduce fraud within the scheme, analysis of the 2023-2024 period suggests a decline in fraudulent claims to £0.6 billion, resulting in a reduction in non-compliant claims from 17.6% to an estimated 7.8% of overall R&D reliefs.
Nonetheless, an increased enquiry rate should not deter companies from claiming under the R&D relief scheme. As HMRC conducts automated risk-based checks to determine whether a claim has a higher risk of non-compliance, there are steps one can take in preparing their claim that will reduce the likelihood of an enquiry.
Reputation
Working with an adviser who has a good reputation within the industry will give you the best chances of avoiding an enquiry. With R&D tax relief claims becoming increasingly policed in recent years due to fraudulent claims, a trustworthy adviser will help you maximise the benefits of your claim while avoiding submission of incorrect and poorly crafted claims, which can leave a company vulnerable to penalties, repayments, and HMRC scrutiny.
A reputable R&D consultant will be aware of what mistakes to avoid that might lower the credibility of your claim. Not only will they ensure that all submission and payment deadlines are met (as a record of poor compliance with HMRC deadlines can increase the likelihood of an enquiry), but they will also be familiar with the latest changes in legislation, ensuring that your claim meets all eligibility criteria effectively. This includes verifying that every expenditure you claim complies with the scheme.
To find a reputable R&D adviser, opt for one who is regulated by a recognised professional body, such as the Chartered Institute of Taxation (CIOT), the Association of Taxation Technicians (ATT), the Institute of Chartered Accountants in England and Wales (ICAEW), or the Association of Chartered Certified Accountants (ACCA). Look at the adviser’s track record, including years of experience within the industry and the number of successfully finished claims. Ideally, your R&D Tax adviser should also be able to assist you with the enquiry process.
Records
It is essential to document proof for all costs claimed and include evidence of these within a technical report, where possible. Businesses that maintain accurate and precise records of their financial transactions experience a reduced risk of enquiry while facilitating enquiry resolution if a process is initiated. Documents often requested by HMRC include business accounts, personal and business bank statements, receipts and invoices, details of investments, assets, liabilities, offshore income and foreign transactions.
The most common pitfalls when assessing records involve inconsistent data between R&D claim figures, profit and loss (P&L) statements, CT600 tax returns, and calculation errors. Careful bookkeeping of these numbers is vital for ensuring your claim is processed as smoothly as possible. To do so, ensure that your financial transactions are promptly recorded in a sound accounting system, store receipts and invoices in a timely and easy-to-access manner, and ensure there are no discrepancies between your bank statements and bookkeeping records.
HMRC will also compare businesses from similar fields to identify anomalies in a company’s records, particularly those with unusual profit ratios. For staff costs, it is essential to exercise caution when apportioning staff expenses, particularly the time allocated to R&D. As companies must split their claims by project, it is best practice to avoid estimating time in internal record-keeping systems. Instead, methodologies based on estimations should have a justifiable reason and be adequately explained in the technical narrative.
Reports
A strong technical narrative will strengthen your claim as it will allow you to showcase to HMRC how the work undertaken within the financial year meets the definition of R&D as per Section 1006 of the Income Tax Act 2007 and the Corporation Tax Act 2009 (CTA 2009). A technical report should be outlined in conjunction with the mandatory Additional Information Form (AIF) to provide a more detailed explanation of the project’s scientific and technical aspects.
Write-ups should be comprehensive and provide an in-depth examination of the technical details, offering sufficient technical evidence to support the claims. To do so, we emphasise utilising straightforward language to articulate arguments in a clear and confident manner. The narrative should highlight the sought-after scientific or technological advancements, accurately describing how each R&D project results in an appreciable improvement in either the field of science or technology. A review should be undertaken of the existing baseline of technology, highlighting current scientific or technological limitations within the relevant field, including the methods used to overcome the uncertainties encountered. Comparisons, where possible, should ideally be made between the projects and the HMRC guidelines (GfC3 and CIRD manuals).
HMRC will also assess the experience and competence of the members involved in the R&D. As per Part 3, GfC3, “A competent professional is someone suitably qualified or experienced in the field. Usually, this is someone directly involved in the project with professional expertise relevant to the advance being sought”. Therefore, it is essential that the narrative includes a breakdown of the correct staff members involved in the R&D and explains why they qualify as competent professionals within their field of expertise. This should include the number of years in operation, previous experience on similar projects, and any possible awards won or nominated for.
Aaaahh! An R&D Enquiry!
Whether your claim value has significantly increased from previous claims, general industry checks, or a randomised pick, there are unfortunately still a few ways your claim might be subject to an enquiry. This is why it is incredibly valuable to work with a reputable adviser within the industry who can defend your claim in case an enquiry arises. Nevertheless, the previous steps will reduce risk factors for any company seeking to claim credits under the R&D tax scheme.
