It has been obvious for several years that many R&D claims are either inflated way beyond their true value or, in some cases, entirely bogus. It was also abundantly clear that HMRC adopted an exceptionally relaxed approach to claim reviews and many spurious claims were known to have slipped through the net and been paid out to companies.
However, following estimates that £311 million of claims for R&D Tax Credits in 2019-20 should never have been paid, HMRC is now taking action and has announced the recruitment of an extra 100 new staff specifically to work on checking R&D claims, starting with 2020 claims. HMRC is also establishing a revised risk screening process to support the review of R&D Tax Credit claims submitted by companies as well as accelerating plans to implement a random enquiry programme.
This step-up in compliance acknowledges the reality is that there is almost certainly significant over-claiming taking place within the R&D Tax Credit scheme and it is guessed that the true figure is well in excess of the £311m estimate.
It is certainly beyond doubt that many claims with basic errors have gone unexamined, a situation acknowledged in a severely critical National Audit Office report that accompanied the 2020 HMRC annual report and accounts.
However, this past failure by HMRC means that the fact that a claim has not been examined to date should not be taken as any indication that it is satisfactory.
If problematic claims are detected by HMRC, the company could be subjected to a review of its tax records for up to six previous years and this can be extended if it is believed that deliberately misleading transactions have been submitted.
So, with HMRC stepping up its examination of R&D Tax Credit claims, just how likely is that that companies will face an enquiry?
In some respects, it depends in which sector the R&D claim sits. R&D projects based around the development of software are particularly at risk as the indications are that even within the last 6 months, HMRC has come to believe that many software-based claims should not have been submitted and that these are more likely to face an enquiry.
Claims relating to engineering and construction are also being examined more closely, particularly for companies that undertake one-off, bespoke projects for individual clients as these may fall foul of new guidelines that place restrictions on subcontracted R&D.
Certainly, many companies involved in the Construction and Civil Engineering industries are finding that their R&D claims are not sailing through as they once did.
Also at significant risk are those companies that have been persuaded by spurious R&D advisors that they are undertaking qualifying R&D when they are clearly not. This type of rogue advisor is operating on the basis that HMRC has a “light touch” approach to claim evaluation, that smaller claims are just nodded through and that only a small fraction of larger claims will come under scrutiny.
Clearly the nature of the R&D and the sector in which it sits is relevant to an enquiry, however the presentation of the claim documentation is probably the major contributing factor to whether HMRC is likely to take more than a passing interest in an R&D submission.
Probably the most common flaw is a failure to adequately spell out the precise nature of the technical advance. Whilst a report may be produced which describes what was built and why it is a good commercial idea, companies consistently neglect to describe the actual advance in science or technology. Very often this is to hide the fact that there is no real technical advance.
Another factor that increases the likelihood of an HMRC enquiry is not distinguishing between activities that are “challenging” and uncertain”.
“Uncertainty” is present when a competent professional in the relevant field of technology could not readily deduce a solution. On the other hand, something may be “challenging” by being complex and having a lot of moving parts to deal with, but it cannot be claimed to be “uncertain” because, given enough time, it is perfectly solvable.
What makes something truly uncertain is when a competent professional in the field can’t just methodically work their way through it with any certainty. To be clear, activity which is technically uncertain may be claimable as R&D, but something which is merely a challenge will not be.
Applicants should read and re-read their claim document to make sure that it contains clearly described advances in science or technology along with the technical uncertainties that had to be resolved.
Extract from: https://www.linkedin.com/pulse/rd-tax-credits-how-likely-hmrc-enquiry-rufus-meakin/?trackingId=1JQ4BdfXTpywKXzrw50m5g%3D%3D
Rufus Meakin – Strategic Partnership Sales Associate
