The background to this accelerated compliance activity, is a fear in HMRC and the Treasury that the R&D tax relief scheme is being abused. There are two major concerns:
Against the backdrop of the well- publicised Covid-support scheme fraud, the Treasury are pressuring HMRC to get a grip on these problems.
HMRC’s response has been to increase the number of staff who are checking claims, and begun to use their Fraud Investigations Service to proactively target those suspected fraudsters who may be seeking to exploit the R&D tax relief scheme.
We believe that once these personnel and policy changes have been put in place HMRC could check up to 30% of all R&D tax relief claims.
Historically, when HMRC wanted to check a claim, they would have normally opened an enquiry into a tax return. Opening an enquiry is a legal power that HMRC have; their aim is to review an R&D tax relief claim to ensure it complies with the relevant legislative conditions
At a wider level, in recent years, HMRC have consistently checked a limited number of companies’ tax returns.
Generally, these are data-driven enquiries, meaning that HMRC looks at a wide range of information available to it and selects the most interesting, or potentially non-compliant, tax returns to check.
HMRC continuously revise and improve their data-crunching, so their algorithm gets better at selecting cases where they suspect there has been an under-assessment of tax due.
However, we do not believe HMRC is currently very well targeted, or led by data, in the R&D space. As a result, we are seeing evidence that many of the recent HMRC enquiries feel more like ‘random checks’, rather than data-led compliance reviews.
Presumably, as HMRC checks more and more claims, they will identify patterns that will allow them to better target potentially non-compliant activity.
HMRC are not only increasing the amount of normal enquiry activity, they are also using new, more assertive tactics to uncover fraudulent claims.
These new techniques include sending letters from the Fraud Investigation Service team. These assertively worded letters say that HMRC are withholding payment until further information is provided by the claimant company.
Clearly when a company director receives such a letter, even for a fully valid claim, it will create real concern and can easily take up a significant amount of management time.
These Fraud Investigation letters are a recent development, so we’re not yet sure what HMRC’s playbook will be. But we have noticed a real scatter-gun approach in how they are targeting clients.
The key take-away, for the moment, is that receipt of a letter from the Fraud Investigation Service is not necessarily an indication of your R&D tax relief claim being incorrect.
In these circumstances, it is important to seek expert advice to respond in the best way possible.
Our advice is, in the event that you receive a letter opening an investigation, do not panic, and instead get in touch with Easy R&D.
These letters are generally aimed at companies that are specifically set up to carry out fraud.
Where there is a legitimate company behind a claim, normally the HMRC R&D Incentives Team would carry out the investigation.
Our conclusion from this is that HMRC are trying to refine their data-led approach in the R&D tax relief space, using a broadcast fraud check process, helping them refine their data and fraud identification software.
Unfortunately, in the immediate term, this means that a number of entirely legitimate claimants are being reviewed.
If you have submitted your claim through Easy R&D, all our claims are checked
and supported by rigorous technical reports, with evidence to show you are submitting a compliant claim.
It is also important to know that HMRC do not have free reign to act as they desire in an enquiry or investigation. They are bound by the powers that Parliament have bestowed upon them, in the say way the Police cannot do as they please. There are clear processes they have to follow.
This measured approach to supplying information in response to an HMRC request, can feel counter intuitive, but is helpful for many reasons.
It may mean you need to invest less time in gathering information, by giving HMRC less than they requested, but enough to satisfy them that the claim is correct. The other advantage of this approach is there is less information over which HMRC might get excited.
Sometimes, if unnecessary information is provided, an enthusiastic HMRC officer will spot something they believe to be of interest and ask rounds of questions, despite there being no real issues with a company’s tax return or accounting. The net effect of providing reams of information in response to an HMRC enquiry, well intentioned as this may feel, can be even more time has to be invested in answering further HMRC questions.
With this in mind, on receipt of any letter from HMRC about your R&D tax relief claim, please contact Easy R&D, as your first step. As part of our enquiry warranty service, our expert customer success team and tax consultants will fully support you as you navigate an HRMC enquiry, so you respond in the best possible way.
All with no additional costs for our professional services, which are related to the enquiry, and with the added peace of mind of working with experts who understand HRMC’s processes and can minimise the strain and operational impact of HRMC questions.
We provide reports, supporting every claim that will fully match, and usually go further than, HMRC’s and the Department for Business, Energy & Industrial’s eligibility criteria.
This is why we would always recommend working with experienced and well-scaled R&D tax adviser with the resources, experience and customer-service philosophy that will help you in the long term.
At Easy R&D our unique approach is driven by experience, evidence and our measured approach to risk mitigation, and long term customer relationships, which we have developed since 2014.
If you have any queries or concerns about HMRC enquiries, please get in touch with your Easy R&D Customer Success Manager, or contact us via email or telephone.
Our experienced national team are here to help.
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Every customer and every claim we work with benefits from our deep expertise in how HMRC manages R&D tax credit applications.