HMRC’s seemingly indiscriminate campaign of enquiries into R&D Tax Credit claims received wider attention this week as The Chartered Institute of Taxation (CIOT) published a letter it has sent to HMRC outlining the deep concerns of some of its members.
The concerns relate to the way that HMRC is conducting its enquiry programme, the operation of which the CIOT believes may not be meeting the requirements of HMRC’s own Charter.
The topics contained within the CIOT letter will be familiar to most R&D Tax Credit advisors and accountants but many outside the field will be unaware that claiming R&D Tax Credits is now a high-risk business activity.
These are some of the main problems identified in the CIOT letter.
Refusal by HMRC to take meetings or engage with the claimant, other than by email
A “volume-based” compliance approach has been a notable feature of HMRC enquiries since 2022.
The CIOT describes this as involving HMRC in “frequent challenge and standardised letters with little or no opportunity for businesses and their advisors to explain the R&D activity they are engaged in”.
Previously it had been normal practice for HMRC caseworkers to meet with the technically competent professionals in the claimant company to discuss the eligibility of an R&D claim.
Standard practice now appears to be to refuse all attempts to arrange a meeting, with all correspondence being carried out by email. This contradicts the guidance in the CIRD manual (para 80550) as well as HMRC’s enquiry manual EM1822 which states that “meetings with the taxpayer are an important part of enquiry work”.
Competent professionals’ opinions being ignored
There is a particular problem within HMRC’s Individuals and Small Business Compliance (ISBC) team where the volume-based compliance approach seems to have led to significant numbers of untrained caseworkers handling large numbers of R&D enquiries.
Not only do decisions seem to be made too quickly by caseworkers who are not reading the details submitted with the claim, in many cases the correspondence from HMRC appears to indicate that caseworkers are overriding the opinion of the competent professional and are “elevating themselves into the role of competent professionals”.
HMRC caseworkers are effectively making their own judgement as to whether projects represent an advance in a field of science or technology, rather than competent professionals.
Penalties being threatened without good reason
Many R&D claimants are receiving pre-decision letters that also include mention of penalties for misfiling.
The CIOT provides example extracts from HMRC letters that discuss penalties that seem to be highly dubious, for example by implying that a filing was “careless” even though the claimant had relied on advice from a specialist R&D agent and, more bizarrely, suggesting that a claimant should have taken more care when preparing its claim by calling an HMRC helpline which doesn’t exist.
Error-riddled correspondence
Most R&D advisors and claimants will be familiar with the amateurish correspondence received from HMRC.
Examples cited by the CIOT include grammatical and typographical errors, jumbled and confusing information requests (including repeatedly requesting the same information in different letters), issuing documents in the wrong format and asking for email protocol authority despite it already being provided.
Valid R&D claims being rejected
The CIOT is warning that HMRC’s efforts to get tough on the abuse of R&D Tax Credits are resulting in legitimate claims being rejected whilst other genuine claimants have been “stone-walled” in a bureaucratic system which is driving them to give up on their claims.
This situation has led to “a breakdown of goodwill and trust between HMRC and taxpayers and their agents”.
Ellen Milner, CIOT Director of Public Policy, commented:
“We are receiving a large number of reports from our members about the difficulties being encountered by firms carrying out genuine R&D. Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so. Those businesses that do seek to challenge HMRC’s rejections seem to meet a brick wall, finding it very difficult to get a hearing for their case.
“The result of this inflexible, confrontational approach is 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 intention of encouraging R&D.”
“Abuse of R&D relief is a substantial problem, but in their efforts to tackle it, HMRC needs to be careful not to throw the baby out with the bath water”.
R&D advisors in agreement
The CIOT letter to HMRC echoes what many in the R&D advisory community have been saying for a while. I have also covered some of the issues previously in my Newsletter.
Senior R&D industry leaders have praised the CIOT’s intervention.
Tom Watson, Compliance Director at MSC R&D and a Chartered Tax Advisor, welcomed the letter:
“The CIOT letter is an accurate critique of HMRC’s recent approach to handling R&D Tax Credit enquiries. The content and examples described confirm how consistent and uniform the poor treatment of taxpayers has been of late.
“One of the most concerning aspects of HMRC’s current practices is the movement away from productive and constructive dialogues. In the past, where enquiries were opened, the tone of discussions would be more focussed around clarification and it felt like a more collaborative effort between HMRC and taxpayers to agree how the guidelines applied to potentially qualifying activities.
“Unfortunately, the CIOT letter echoes the general consensus that HMRC is not open to engaging in productive dialogues, always reverting to a line around insufficient evidence having been supplied, without establishing whether the content of information has in fact been understood by the assigned caseworker.
“Hopefully the direct and well-reasoned nature of the CIOT letter will result in a return to more open communications between HMRC and taxpayers, along with a cessation of the more damaging behaviours, particularly regarding improper consideration of penalties, which often comes across as intimidating and wholly inappropriate to taxpayers who have taken the reasonable care to seek professional advice”.
Long-standing industry expert Terry Toms, the Managing Director of RandDTax who has been in the R&D Tax Credit advisory field for over 20 years commented:
“All of us have become only too aware of the damage being done by the recent misguided, but perhaps necessary, purge by HMRC.
“Unfortunately, the intention to weed out the cheats and those overclaiming or wrongly claiming has already inflicted untold damage to honest SMEs committed to investing in genuine R&D work.
“The CIOT has described the situation accurately, and surely our government must now see why HMRC must reverse the damage already done as soon as possible. Their actions, which have been a total reversal of what has been done in the last 20 years, have caused that damage.
“By ignoring any attempt to maintain a fair system, HMRC has created the unintended consequences of a well-intentioned purge gone very badly wrong, through almost totally losing sight of key aspects of existing published HMRC Guidelines, and a widespread misunderstanding of the threshold of R&D Tax Credit qualification by badly trained, or not-at-all trained HMRC staff”.
Suzanne Clements is an ex-HMRC Tax Inspector who helped to develop the R&D Tax Credit regime, trained HMRC staff and piloted the Advance Assurance Scheme. She now manages R&D Tax Credit Quality Assurance at MSC R&D. Suzanne said:
“I find it concerning that a team that carries out “volume compliance” has been tasked with the very case-specific work that is indicated by an enquiry into a company’s R&D Tax Credit claim. In the past, such work would be carried out by qualified tax inspectors with several years’ experience.
“HMRC is justifying the use of unqualified and inexperienced personnel on the grounds that “this is an emergency” due to fraud and error. If it is an emergency, it is HMRC’s fault for throwing away its R&D specialists and not policing the system for years.
“However, its statistics for fraud and error have always been suspect, and now it is holding up the alleged success of the new approach – ie enquiries closed in HMRC’s favour – as evidence of that fraud and error.
“It is no such thing”.
“As the CIOT letter makes clear, it is simply that taxpayers have no choice in many cases but to walk away from this systematic obstruction. What are they to do when it is impossible to hold a reasoned discussion and the very systems meant to protect them from abuse – the complaints process, the independent review – are themselves also now obstructive?
“The cost of defending an R&D claim is often prohibitive. The result is that a system intended to support the innovative economy has become debased coin.
“HMRC needs to act decisively or it will have lost all trust and companies carrying out R&D will not choose to be sited in the UK”.
The full CIOT letter can be read here.
Content by Rufus Meakin (R&D Tax Credit Insider Newsletter)
Find the full article here
