How confident are you in your ability to handle an HMRC enquiry into an R&D tax relief claim?
In the past you might have felt confident in compiling an R&D tax relief claim for your client.
If you have prepared a robust claim for your client, then this should withstand this extra scrutiny. You and your client should be able to answer HMRC’s questions. But if not, then it can affect the value of the claim and in some cases penalties are applied. An enquiry might mean the client’s R&D tax relief could be delayed but HMRC can raise an enquiry even if your client has already received the benefit.
As one the longest established innovation tax specialists in the UK, we have the experience, knowledge and expertise to respond to an enquiry. We undertake a quick assessment of your client’s R&D tax relief submission and we will give your client a clear and frank opinion of the best way forward.
How do I know if my clients are at risk from an HMRC enquiry?
Even if your client isn’t facing an enquiry into their R&D tax relief claim there is still a risk. We can offer the same service against any of your clients’ previous submissions so that your client has a clear understanding of any potential risks. This proactive approach can provide peace of mind and ensure that you and your client have confidence that the claim is robust and defendable should it become subject to an enquiry. It can protect against reputational risk for you and allow the client to plan for the future with certainty
The increased likelihood of an HMRC enquiry into R&D tax relief claim
HMRC estimate that fraud and erroneous R&D claims have cost the British taxpayer £469m in the 2021-2022 period, this is up from £336m estimated in the 2020-21 period.
In response, and reinforcing HMRC’s commitment to tackling error and fraud in the R&D tax reliefs, HMRC implemented additional measures including:
- establishing a threat risk assessment process for all R&D claims
- implementing additional payment identification and verification controls for all research and development payments
- accelerating the creation of HMRC’s Research and Development Anti Abuse Unit which was announced in the Autumn 2021 budget.
This makes the likelihood of an HMRC enquiry much more likely, and dealing with that Enquiry could require a technical knowledge, time and resource that that simply hasn’t been called for in the past.
Establishing the R&D baseline using patent landscaping
When one of your client’s is facing an HMRC enquiry may be asked the question “How did you establish the baseline for your R&D?”. You may not have included this baseline information in the preparation of their claim. Or you may have taken the client’s information at face value, many businesses assume they know what the baseline is because they have been in the industry for a while.
One way to be absolutely certain of the baseline, and to evidence this for HMRC, is to analyse the patent landscape. Often products and technologies never make it to market, so effectively remain “hidden”. This could mean that your client’s competitors may have carried out the R&D before, even if they don’t currently sell the resulting innovative product or service.
Using patent information can be a fundamental part of demonstrating that an R&D project is seeking to achieve an advance in overall knowledge or capability. This in turn establishes the baseline. GovGrant can provide a snapshot of the patent situation for a specific technology that answers the baseline question for HMRC.
Do you always know who is offering R&D tax advice to your clients?
Sometimes your clients will make their own arrangements for the R&D tax relief claim, maybe using a less rigorous provider, using a simple online tool, or indeed going it alone. This can represent a risk to them and they may find that the other provider is unwilling or unable to offer support in the case of an enquiry. Equally, they may not want to rely on their current advisor and would like a different, independent pair of eyes to review the claim.
This has reputational implications for you as your client comes to you for help and support.
If you are an existing GovGrant Partner and we have prepared the claim on behalf of your client then we defend any enquiry free of charge. GovGrant will run that process on you and your client’s behalf. We have the confidence to stand by our claims with a proven claim methodology and a rigorous quality assurance process.
We can offer enquiry support to businesses – whether they are existing clients or not. You can offer this service to your clients whether you are an existing GovGrant partner or not.
The first step would be an HMRC enquiry report which gives your client a full assessment of their position and what options they have. Then we can discuss your next steps and support your client if necessary.
We would recommend seeking specialist advice as soon as the enquiry is raised by HMRC. It is important to be prompt, open and responsive to HMRC, but embarking on that conversation without a clear view of how to defend the claim, or indeed an assessment of whether the full claim is defendable will only exacerbate the situation. There can come a point in the enquiry service where the process and gone too far for us to offer to represent the client
Businesses may overestimate how much of their cost is linked to R&D, they might call an activity R&D internally but it might not meet HMRC’s guidance. With new product development, for example, the new product itself might not necessarily be innovative so to establish whether R&D had taken place we would focus on the steps taken to achieve the new product, successes, and failures. This is where the qualifying activity could lie.
If you have taken a figure for R&D qualifying activity at face value then you may struggle to justify the claim during enquiry.