Hundreds of companies right across the UK have recently been receiving ominous-looking letters from HMRC headed “Check of the Company tax return”.
In a worrying development for many CFOs, the letter is described as a “compliance check opening notice [which] tells you I am going to check the Company Tax Return for the period shown above”.
The next paragraph – “What I am checking and why” – mentions the company’s claim for Research & Development Relief. This means that HMRC has officially opened a compliance check, or R&D Tax Credit enquiry, into an R&D Tax Credit claim and that they are requesting further information to verify that the claim has been made correctly.
These letters will come as a shock to most companies who may well have believed that HMRC’s oversight of R&D Tax Credits was so lax that their R&D claim had become just a routine part of their annual accounting process.
So what has gone wrong for so many companies and what can they do about it?
Why HMRC is increasing the number of R&D Tax Credit enquiries
As written before, HMRC has been stung by criticism regarding the enormous levels of fraud and error in the R&D scheme so it is now devoting a large amount of resource into ensuring that R&D claims are accurate, as well as hoping that word will spread amongst businesses that applying for R&D Tax Credits is no longer the routine process that it once was.
Companies now need to be very careful to ensure that their R&D claims are completely accurate, and in particular that the activity being put forward as qualifying R&D is actually Research and Development as defined by HMRC in the “BIS Guidelines”.
R&D Tax Credits in the UK are exceptionally generous by international standards. Indeed, on some measures, the SME credit is the most generous scheme of its kind in the world.
Because of this generosity, the scheme has become open to abuse so the Treasury is becoming focussed on more effective targeting of the scheme as well as looking for HMRC to take a stricter application of the rules to ensure that the scheme is working as it should.
Many companies are now being caught out by what they had assumed was a very lightly-regulated regime but which belatedly appears to have some very complex and stringent features – of which the heightened level of HMRC enquiries is the most obvious manifestation.
Once an enquiry letter is received, what should a company do?
It is always advisable to get things right first time so the first thing the claimant should do upon receipt of a R&D Tax Credit enquiry letter is to ask HMRC for an extension to the deadline.
The average length of time between HMRC sending an enquiry letter and the deadline it sets for receipt of the required information is currently around 5 weeks.
This is not generally enough time for the claimant to put together a robust case (although this does depend on the depth and complexity of the questions being asked). To give enough flexibility therefore, the company should write to HMRC to request an additional month or so in order to adequately address the questions.
Get some expert help
The next step is to ensure that the claimant has access to professional expertise from someone who is an expert in handling an HMRC enquiry.
This importance of this cannot be stressed enough.
- If the company completed its own R&D claim in-house, then it should seek recommendations for the services of an expert R&D Tax Credit advisor, and preferably one that employs ex-HMRC inspectors that have worked on the R&D team within HMRC.
- If the company used an accountancy practice or an R&D specialist advisory firm to complete its claim then it should immediately forward the enquiry letter to the relevant accountant or advisor and ask them what degree of expertise it has in defending such enquiries.
It is critical that the company then goes on to deeply probe the accountant or advisor’s experience and expertise.
Very often, an accountant or R&D advisor will fatally misjudge the extent of the enquiry problem by believing that the HMRC questions can be easily addressed. They may even become protective of their client relationship and be unwilling to hand over the enquiry to a more appropriate third-party, perhaps because they fear that their poor knowledge of the scheme may be exposed to their client. They may even be concerned that their own lack of expertise could have contributed to the HMRC enquiry being raised in the first place.
If there is any suggestion that the R&D advisor does not have the capability to handle the enquiry, then the claimant should seek outside specialist help in the form of a recognised expert.
Failure to engage with an expert who has experience in handling a HMRC R&D Tax Credit enquiry could significantly jeopardise a successful resolution to the enquiry.
Next week we will cover specific expertise and forms of remuneration.
Thanks to Rufus Meakin – MSC R&D Sales Associate and specialist in large R&D Tax Credit claims; Industry-leading seller of R&D Tax Credits since 2005.
To read the full article, written by Rufus Meakin, please click here
