A comprehensive, well-prepared, and accurate R&D tax credit claim is critical, not just for maximising your client’s claim but also for avoiding an HMRC enquiry.
R&D tax credit claims are reviewed together with their relevant supporting documentation and, if no further clarification is needed, processed fairly swiftly (usually within 28 days). It is the process of further HMRC clarification that is referred to as an enquiry.
In recent years, HMRC has started to scrutinise the accuracy of R&D tax credit claims in more detail, and enquiries are one of the chief ways they go about determining legitimacy. These tax compliance checks are merely security measures. So if you have nothing to hide, you have nothing to fear.
That being said, dealing with an enquiry from HMRC can cause major disruptions to the day-to-day running of your client’s business. There is also the risk of a reduction in your claim or penalties if the claim contains significant errors, as well as the risk of damaging the relationship your client has with the HMRC.
Fortunately, enquiries can be easily avoided. Follow the steps below to ensure your client isn’t caught out.
Why HMRC might launch an R&D tax credit enquiry
HMRC generally launches an enquiry when they dispute an R&D tax claim or need clarity on specific aspects. They also launch enquiries as part of their efforts to ensure government funds are distributed fairly. As your client’s accountant, you will be the person HMRC contacts regarding an enquiry.
The following could result in an HMRC enquiry:
- HMRC finds inaccuracies or inconsistencies in the claim. For instance, this could be in the form of missing figures or information which isn’t clearly supported.
- There has been a change in your client’s circumstances that affects the value of their claim.
- HMRC wishes to review your client’s tax return, which also includes a review of their R&D tax credit claim.
- Your client’s company or industry is one that HMRC are particularly interested in. They might want to focus their enquiries on this sector for various reasons.
In addition, HMRC opens enquiries randomly on a percentage of all R&D tax credit claims. This is done to test procedures and check the tax relief schemes are working as intended. As alluded to in the last point, a tax enquiry could be more likely if your client works in a field or industry that HMRC is currently interested in.
The enquiry process
Enquiries are typically launched around 28 days after the submission of an R&D tax credit claim. This is the timeframe HMRC aims to adhere to when reviewing claims. However, enquiries can start months after a claim submission. Your client will most likely receive a letter stating HMRC are performing a compliance check.
During the course of an enquiry, which can last several months, HMRC could ask to check the following:
- Company tax returns, including your client’s self-assessment tax return.
- Accounts and tax calculations.
- PAYE records and returns for employees.
HMRC might send an inspector to your client’s place of work or ask them to come to HMRC’s offices. You, or a legal adviser, can accompany your client when this happens. Note that a penalty can be expected if your client refuses the visit. The only exceptions being if you’re seriously ill or affected by the death of a loved one.
Potential outcomes of a HMRC enquiry
The outcome of an HMRC enquiry can vary. Here are some of the costly ones to consider:
- If HMRC are not satisfied, they can disqualify certain costs from your client’s claim, thus reducing its value. This can lead to repayments based on funding that was previously given. HMRC’s enquiries can cover material as far back as seven years that relate to an R&D tax credit claim.
- In the rare circumstances where HMRC believes your client has attempted to subvert and defraud the taxpayer, they will implement penalties. These can be up to 100% of the value of the R&D tax credit claim.
- Diversion of your client’s time and resources to address the enquiry is a third important consideration. HMRC enquiries can take months or even years to be completed. Answering HMRC’s questions may also require your client’s specialist employees, which takes up valuable time. Therefore, even if resolved, the enquiries could incur a high cost in terms of resources.
How to avoid an HMRC enquiry
Businesses can sometimes be put off from claiming R&D tax credits due to the risk posed by the outcomes just outlined. However, by adhering to this simple checklist, you should have no problem avoiding an HMRC enquiry:
- Ensure your technical report demonstrates you understand HMRC’s definition of R&D and outlines how your client’s projects meet it.
- Encourage your client to practise comprehensive, up-to-date record-keeping. Being transparent with company records will help improve the accuracy of your claim and relate it to your client’s R&D costs immediately.
- Identify the staff member who has contributed most to overseeing the R&D work and get them to make the written parts of the accompanying report. Note that this person will not necessarily be in a senior role.
- Ensure the reasoning used within the claim is robust. Why is this R&D work important? Be careful not to stray from HMRC’s definition, though. The staff member you’ve identified (see previous point) can help with this.
- A well-prepared claim will withstand scrutiny and is your best weapon against an HMRC enquiry.
Related: What expenses qualify for R&D tax credit.
How to respond to an enquiry
Sometimes an HMRC enquiry is unavoidable. If this is the case, there are certain things you and your client can do to ensure the time spent on the enquiry is minimised, while maintaining good relations with HMRC. The latter can help in deterring future enquiries.
It’s important not to panic. Handling an enquiry might seem daunting, but HMRC aren’t out to trick you. They merely want to ensure the R&D incentive schemes are fair and that the funds are being administered responsibly. So give them as much information as they need for them to do their job. Answer questions as directly and as clearly as possible. In short, a cooperative, professional, and friendly approach is best.
Why made.simplr?
Developed specifically for accountants, made.simplr’s all-in-one R&D software is not only fully compliant with HMRC’s guidelines, but fully automated, intuitive, and integrated with Xero. This means every step of your claim is meticulously planned and prepared, leaving little room for error.
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