Back in July, The Chartered Institute of Taxation (CIOT) wrote a letter to HMRC expressing its concerns over the way HMRC was conducting its rapidly expanding R&D Tax Credit enquiry programme and in particular its “volume compliance” approach.
Having listened to the complaints of its members, the CIOT’s letter suggested that HMRC may not be meeting the requirements of its own Charter.
HMRC has now responded to the CIOT with an acknowledgement that its handling of some R&D claims has indeed not met the standards and commitments under its Charter and that it will introduce measures to improve its internal training and assurance processes.
HMRC states that “it is inevitable that the reforms and operational action required to tackle the problem will have an impact on compliant claimants”.
It is positive that HMRC has acknowledged problems, however the letter is worrying in that it is now clear that legitimate R&D claimants are collateral damage in the enquiry campaign.
HMRC also implies that they consider these to be specific instances rather than an underlying problem with the current system. This would be a concern as it means they continue to use a flawed approach.
In my article, I take a brief look at two particular aspects of the HMRC letter that will cause unease amongst both R&D claimants and the advisor community.
1. HMRC believes that “half of all R&D claims are non-compliant”
The letter confirms HMRC’s updated estimates for error and fraud within the SME and RDEC R&D schemes. It believes that:
- the total amount lost to fraud and error is £1.13 billion of which £1.04 billion is within the SME scheme, equivalent to 24.4% of all the money paid out.
- half of all R&D claims are non-compliant, a figure which rises to 75% of all claims under £10,000.
I’ve spoken to senior people familiar with HMRC who said the non-compliance figures are staggering and unlikely to be correct as they are based on a flawed understanding of the definition of R&D for tax purposes (known as the BEIS Guidelines).
Said one expert, “I think they are massively underestimating the number of R&D claims which are dropped by claimants because they either can’t be bothered fighting it or can’t afford to fight it. Their commentary on this shows, I think, huge levels of misunderstanding of the commercial world”.
Another told me that “if you wrongly tell people they don’t qualify whenever you open an enquiry, and then count them as non-compliant because they don’t go all the way to a tribunal, you risk creating thoroughly false data. This then potentially becomes a self-fulfilling justification.
“This is a letter which is approved at senior level, so we must assume that the problems with understanding the R&D Guidelines run right to the top of the decision-making tree. The management levels are often career civil servants with no great tax expertise in the subject matters they are responsible for. There is therefore a tendency to rely on their technical advisers for opinions. Given this, and the way those advisers have imposed a series of highly questionable interpretations, it seems that matters may not substantively improve until further litigation has taken place”.
2. HMRC rejects meeting with R&D claimants “in most instances”
The initial CIOT letter set out major concerns at the way that HMRC is refusing to meet with R&D claimants to try and resolve enquiries.
The CIOT wrote:
“In our view, a volume compliance approach is not suited to R&D enquiries which, generally, require meaningful engagement between HMRC and taxpayers to ascertain whether there is an R&D project in accordance with the Guidelines. The desk-based approach … is likely to be counterproductive overall in some cases”.
In its response, HMRC explains why it has implemented “large scale compliance activity” and why it is unable to provide the more proactive engagement (ie a meeting) with claimants:
“It’s entirely understandable why many agents would prefer a more bespoke one-to-one service particularly given the complexity of some of the claims. However, the number of R&D claims in a year has more than doubled since 2015-16 (90,000 per year in 2020-21 up from 43,000) and half of all claims are assessed as being at risk of not qualifying for the relief or being inflated”.
“We do not believe a meeting is required to conclude an enquiry, but that route remains open where it is deemed necessary”.
This highlights the problem of HMRC’s belated attempts to get a grip on R&D Tax Credit fraud and error. It seems that HMRC failed to take any concerted action between 2015 and 2022 and, due to its increased workload, is now denying legitimate claimants the opportunity to engage in a proper dialogue regarding their enquiry.
This is despite the HMRC’s internal enquiry manual (EM1822) stating that:
“Meetings with the taxpayer are an important part of enquiry work. These can be face to face or via a telephone or video conference. Meetings are often the best way to find out the facts about a business and give you and the taxpayer the opportunity to discuss the identified risks and how you have arrived at any conclusions you have already reached. Depending on what stage you are at in your enquiry, holding one or more meetings, will also help you establish facts, settle any points of disagreement and reach an agreed settlement with the taxpayer”.
The use of meetings is also part of HMRC’s code of practice for specialist R&D offices at CIRD80525 (which was updated as recently as July 2022):
“During the course of an enquiry into an R&D claim, an officer from a specialist R&D Unit will normally make arrangements to discuss the claim with the company’s management and technical experts”.
Yet requests for meetings are repeatedly being refused on the grounds that HMRC “does not feel that would be helpful in progressing our enquiry at this time”.
In summary
Despite HMRC’s assurances, the CIOT says it remains concerned that the volume approach to managing R&D enquiries means that legitimate claims will continue to be rejected and the underlying objectives of investment in UK innovation and economic growth will be undermined as businesses are put off claiming relief to which they are entitled.
As the recently published House of Lords Finance Bill sub-committee report into R&D Tax Credits recommended:
“HMRC should address the criticisms witnesses made of the way its compliance activities are conducted. These included an inconsistency of approach, failing to take account of information already received from claimants when making enquiries, poorly focused questions and a reluctance to engage constructively with taxpayers and their agents”.
Instead of looking inward, HMRC seems to be pointing the finger at the wider R&D advisor community rather than just the “rogue agents” it has spoken of previously.
By repeatedly stating that “around 90 per cent of R&D claims involve an agent” and linking this to its belief that “half of all claims are non-compliant” it appears that HMRC has little trust in the R&D advisor community.
The original COIT letter correctly described HMRC’s “volume compliance approach” as resulting in:
“a breakdown of goodwill and trust between HMRC and taxpayers and their agents and a lack of faith in the R&D tax relief regime being able to deliver for SMEs. The current approach is discouraging legitimate claims from SMEs, which is undermining the policy intentions of encouraging R&D”.
I think we can all agree that this is not a desirable situation.
Content by Rufus Meakin (R&D Tax Credit Insider Newsletter)
Find the full article here
