The problems facing R&D Tax Credit claimants were highlighted again last week as HMRC chief Jim Harra faced more questioning about his department’s handling of R&D Tax Credit compliance checks from the House of Commons Treasury Committee.
Mr Harra struggled to respond to concerns raised by MP John Baron about the way HMRC is managing R&D Tax Credit compliance checks and specifically whether HMRC was
“putting economic growth and innovation at risk by rejecting legitimate claims for R&D tax relief, delaying payments and clawing back tax credits”.
Harra said that HMRC has to strike a balance between promoting innovation and business investment while also safeguarding against error and fraud
“which has recently been reassessed at an unacceptably high level”.
Baron raised the issue of nine tech bosses who had recently told the Financial Times that their treatment by HMRC had “left them exploring moving overseas”, “scrapping plans to create jobs or invest” and “stunted their companies’ growth.”
Baron cited the case of Matthew Millar, the co-founder of fungal discovery platform Really Clever, who had said he was considering moving its operations abroad after his R&D claim was rejected – incorrectly in his view – and that HMRC had denied all requests to discuss the claim on a call.
When asked for his view, Harra evaded the question by saying that HMRC has no backlog of R&D claims.
Unfortunately, Baron appeared to lose his thread which allowed Harra to go into even more irrelevant detail about how HMRC is largely meeting its 40-day R&D claim processing commitment.
For the thousands of legitimate R&D Tax Credit claimants caught up in an HMRC enquiry, whether HMRC pays claimants in 40 days is a red herring. They would much rather hear how HMRC is going to address the cack-handed way that their enquiries are being dealt with.
But Harra wasn’t completely off the hook as Baron returned to the issue later in the exchange, saying that “some of the businesses that spoke to the FT accuse [HMRC] of lacking expertise and producing error in its processing of claims, echoing wider industry concerns”.
One CEO described his treatment by HMRC as “a complete miscarriage of justice”.
Again Harra spectacularly failed to answer the question, this time trying to pin the blame on R&D “agents of variable quality, some of whom push their claimants into making highly speculative claims”.
The only glimmer of recognition of a problem came when Harra admitted that “expertise is a real challenge on R&D” saying:
“My people are tax inspectors. They are not software engineers or rocket scientists and they meet a vast range of claims in areas in which they do not have expertise. Our approach to compliance is to ask the claimant to demonstrate that they have thought through why their claim qualifies for relief”.
This statement is undoubtedly true however, as anyone who has undergone an R&D Tax Credit compliance check will testify, perfectly adequate responses to HMRC enquiries are mostly met with cut-and-paste “computer says no” letters which leave R&D claimants infuriated at the lack of basic technical understanding by HMRC caseworkers.
Harra’s refusal to acknowledge the huge problems faced by legitimate R&D claimants undergoing a compliance check is frustrating.
Everyone in the R&D Tax Credit field can point to nonsensical R&D claims that have been paid out without question whilst clearly qualifying claims have been rejected out of hand by inexperienced caseworkers.
Fortunately, there may be some hope on the horizon.
When asked whether HMRC seeks third-party expertise on assessing “what is innovative”, Harra explained that the purpose of a proposed new Expert Advisory Panel for R&D Tax Credits is to “address the fact that within HMRC we do not have that range of expertise”.
He said that HMRC aims to use the panel’s expertise to quickly process and approve clear R&D claims while ensuring “more questionable claims” receive appropriate scrutiny from the compliance team.
Harra also made reference to a “compliance plan” that will be released shortly and which will enable people to engage with HMRC and give feedback.
The developments cannot come soon enough for many R&D claimants currently in limbo with existing HMRC enquiries that can stretch well beyond 12 months without any resolution in sight.
As one ex-HMRC inspector recently told me, “HMRC’s decision tree only has one branch, not in the claimant’s favour (heads you lose, tails I win)”.
HMRC needs to quickly get its act together before the obvious risk now attached to claiming R&D Tax Credits has a seriously detrimental effect on the UK’s innovation economy.
Article written by Rufus Meakin
Rufus Meakin helps companies prepare complex R&D Tax Credit claims where robust HMRC compliance is essential.
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