From the conversations that I’ve had recently, many accountants have noticed a change in stance from HMRC whose approach has become more forceful and their tone more combative in enquiry matters relating to R&D.
Accountants are finding that to deal with an R&D enquiry requires detailed technical knowledge, time, and resource that their clients have not experienced in the past. Many are coming up against HMRC’s expected standard of a claim (the standard that GovGrant has always held itself to) and have been found wanting.
How far back can HMRC raise an enquiry against an R&D tax relief claim?
HMRC enquiries into R&D tax relief claims are still being opened in substantially increased numbers compared to previous years. HMRC has the right to raise an enquiry against claims for up to 2 years from the filing date of a tax return or amended tax return. However, if they find non-compliance or suspect a fraudulent claim they can, and often do, go back further.
This means the claimant has already received their tax refund or benefited from a tax reduction or received a tax credit and may be under the false impression that the claim has been ‘approved’ or ‘successful’. This is of course not the case and we have seen examples of claims having been paid and processed 18 months earlier to the enquiry being issued – in rare cases HMRC have opened enquiries into three periods at once where they suspect error or fraud.
How are HMRC targeting companies for an enquiry or compliance check?
Victoria Atkins MP, Financial Secretary to the Treasury, recently outlined HMRC’s one-to-many compliance activity, in response to questions raised by the Economic Affairs Finance Bill Sub-Committee. (the full response is linked here).
In summary, HMRC is undertaking one-to-many (OTM) compliance activity into sectors it would not normally expect to see claims from in order to reduce the risk of non-qualifying claims being paid. This activity is undertaken post-payment of the claim and initially, HMRC contacted around 1,000 customers who had made a claim for the first time. The second wave saw HMRC identifying claims from some industries that they believe are unlikely to have undertaken activities that would qualify for R&D tax relief.
In addition to these OTM activities HMRC’s Fraud Investigation Service (FIS) have also written to 1,685 claimants in November 2022 and a further 650 letters were issued in February 2023.
What does a one-to-many enquiry look like?
An OTM enquiry is usually generic and not based on the quality or even presence of a supporting report. This is frustrating for many genuine claimants as they are caught up in this very time consuming process. However, one thing for certain is the questions are still focused and demand detail to evidence compliance. The deadlines tend to be tight and they are typically sent from a generic email address rather than a named inspector.
Which of your clients are more likely to be targeted for an OTM enquiry?
HMRC will not publicise how they target enquiries for understandable reasons, however logically the only way they can target companies in specific sectors or industries is by using the SIC code.
All too often the SIC code is not up to date, it may no longer be relevant or maybe the directors are not aware of the relevance. There is a role here for accountants to provide pro-active advice to their clients to ensure the SIC code is accurate and a true reflection of the company’s nature of business.
So far we haven’t seen any evidence that the size or value of the claim (or the size of the claimant company) is a factor in those that are being targeted for enquiry.
Can an enquiry result in penalties for your clients?
Not only can an enquiry affect the value of a claim, in some cases penalties are applied in addition to any repayment required. If the value is reduced or changed then it is deemed an inaccuracy at which point HMRC are obliged to consider penalties. The penalty is calculated as a percentage of the extra tax that becomes due when the mistake is corrected. The level of that penalty will depend on whether HMRC considers that the inaccuracy is through a lack of reasonable care (at the lower end) through to deliberate and concealed (at the maximum of 100%).
HMRC are appearing to look at penalties more frequently. They are asking specific questions of your clients to assess how to apply the penalties, including how a business chose its advisor, the due diligence they undertook to ensure the advisor was competent, etc. Find out more about penalties in our Knowledge Hub.
What can accountants do to protect their clients?
A sensible measure would be to ensure that your clients have a SIC code that is reflective of their business activities. Your clients are responsible for ensuring that the details recorded at Companies House are true, accurate, and up to date – hence the requirement to provide a confirmation statement at least every 12-months. But as their accountant, you are well placed to advise on their responsibilities.
You may want to consider partnering with a third-party provider to support your clients fully, and with confidence in the R&D tax credit claims being prepared and submitted.