Assessing HMRC’s approach to Research and Development tax reliefs

Key metrics of HMRC’s report*

The MREP reviewed 500 claims submitted by small and medium sized businesses (‘SMEs’) that had claimed under the SME scheme or R&D expenditure credit (‘RDEC’) scheme.

*The report published 17 July 2023.

The key trends emerging from HMRC’s analysis include:

• Half of all claims contained at least some element of non-compliance.
• The smaller the claim the more likely an error was identified.
• Less than 10% of claims examined identified fraudulent behaviour.
• Non-compliance rates remained consistent regardless of whether a company had used an R&D specialist as an agent or

HMRC state nearly half of all R&D claims examined contained an element of non-compliance, which if extended across all claims filed in 2020-21 (89,300 as per HMRC’s data), would equate to approximately 45,000 claims.

The R&D community has cited concerns with the manner in which HMRC conducts tax enquiries into claims for R&D relief, especially for SMEs.  The concerns raised have included the aggressive tax positions taken by caseworkers at the outset of an enquiry, along with a refusal to discuss the nature of the R&D project. Such concerns were presented by the Chartered Institute of Taxation in a letter to HMRC dated 3 July 2023. A lack of engagement is frequently reported in the examples provided by agents.  This is particularly problematic given it contradicts HMRC’s commitment to work collaboratively with taxpayers and their agents as part of the Litigation and Settlement Strategy.

Too often taxpayers are left with a decision as to whether or not it is worthwhile, from a time and cost perspective, to continue arguing the validity of these claims. Many legitimate claims are therefore being withdrawn, which could contribute to HMRC’s identification of a greater risk of non-compliance within lower value claims.

The data reflects that a small proportion of claims were filed on a fraudulent basis, which, given the level of historic abuse within the system, demonstrates significant progress in clamping down on this behaviour.

Alarmingly, we are also aware of instances where HMRC’s Fraud Investigation Service has contacted a company to notify them that their tax return has been corrected to withdraw a fraudulent R&D claim, without consultation. This approach leaves the taxpayer with no statutory mechanism to appeal HMRC’s decision without submitting a further amended return. These cases were ultimately resolved, reinstating the valid R&D claim, after further dialogue with HMRC concluded the original claims were indeed legitimate. Nevertheless, the ramifications were severe, the pause in receiving credit caused cash flow shortages and placed the directors under immense pressure, having been accused of filing fraudulent claims.

It is doubtful whether these such instances are captured within HMRC’s data given these claims were not reviewed through a statutory enquiry.

Of the claims reviewed, HMRC states that only 2% of errors resulted from a technical misinterpretation of the R&D legislation. Given HMRC’s operational data suggests over 90% of customers making R&D claims are represented by an agent, this infers a large proportion of agents either do not understand the legislation or have allowed erroneous claims to be submitted without taking appropriate reasonable care.

This data seems disproportionate. Given the complexity of the R&D tax legislation, many professional advisors have R&D specialists who can advise on both the tax and technical/software aspects. Claims are typically submitted with thorough backing evidence to demonstrate the advancement being sought; it would therefore seem logical that the errors stemming from a technical misinterpretation would be higher.

A possible explanation could be HMRC’s reluctance to discuss the nature of the R&D project. An opportunity to establish the relevant facts is currently being missed, with conclusions being reached too hastily, which could contribute to skewing the data presented by HMRC.

A deeper probe of HMRC’s data suggests the headline grabbing figures contained within the report need to be viewed with caution.

While it is recognised that HMRC have a responsibility to the UK taxpayer to ensure these R&D credits are valid, the enquiry process needs to be conducted in a non-confrontational, collaborative manner.

It is prudent to remain mindful that the purpose of R&D tax relief is to support those companies that work on innovative projects in science and technology. These innovations will profoundly benefit the UK economy and should continue to be encouraged.

Approval code: NTAJ14092354