In July the Chartered Institute of Taxation (CIOT) expressed concerns that genuine claimants were giving up on R&D claims because of HMRC’s approach attempting to reduce error and fraud.
It is no secret that abuse of R&D tax relief claims has been a concern for some time and HMRC are right to be prioritising action to tackle it. However, the CIOT urged that action taken by HMRC needs to be carefully targeted, otherwise it will risk holding back genuine R&D tax relief claims.
On 3 July, CIOT sent a letter to HMRC expressing their concerns and HMRC have now responded.
What were the main concerns?
Volume compliance approach
The ‘volume compliance’ approach adopted by HMRC since the latter part of 2022 is based around frequent challenge and standardised letters, with little or no opportunity for businesses and their advisers to explain the R&D activity they are engaged in.
Historically, conversations were an important mechanism through which R&D activities could be explained to HMRC. However, under the new approach there is no direct engagement between the compliance team and the claimant, either in person or virtually.
Due to the complex nature of the relief and the technical consideration required in ascertaining whether or not there has been a qualifying R&D project, this approach is not suitable.
Valid claims being rejected
The CIOT confirmed that they are receiving a large number of reports from members about the difficulties being encountered by firms carrying out genuine R&D. Valid claims are being rejected and businesses are being deterred from challenging HMRC due to the disproportionate financial and time cost of doing so.
Inappropriate penalties
There are concerns that HMRC are attempting to inappropriately apply penalties in cases where they consider no R&D has taken place. For example, cases where they have asserted that a failure to consult them in advance, instead relying on professional advice, constitutes carelessness.
The CIOT noted that this is not in line with the established law around penalties, or with HMRC’s own guidance.
Breakdown of goodwill and trust
The inflexible and confrontational approach adopted by HMRC is leading to a breakdown of goodwill and trust between HMRC, taxpayers and their agents and a lack of faith in the R&D tax relief regime being able to deliver for SMEs.
What were the main responses from HMRC?
HMRC hasn’t met their standards and commitments
HMRC have acknowledged that their handling of some R&D tax relief claims has not met their own standards and commitments under their Charter. HMRC states that they are taking steps to improve their training and assurance processes.
HMRC’s letter says that going forward it may be possible to have a meeting (escalation processes), but it is not clear how this avenue will operate in practice. CIOT has noted that it is disappointing that determining whether a meeting is necessary (a higher bar than a meeting being helpful) seems to be solely within the discretion of HMRC.
Concerns around “rogue” agents reiterated
HMRC again reiterated their concerns regarding some R&D agents (often referred to as boutique firms) saying:
“At their best, agents enable their clients to access the relief they are entitled to. However, as you and other stakeholders have told us previously, there are also agents who either lack capability or purposely abuse the schemes.”
In view of this expect HMRC to continue their crackdown on R&D claims past and present.
What now?
The hope is that the new compliance measures which came into effect in August 2023 will help HMRC identify risk areas and better target compliance activity.
The training of HMRC R&D teams is welcome and CIOT notes that it is committed to working with HMRC to improve the situation, ensuring all agents understand what is required in relation to claims for R&D relief.
Need our help?
It is a step in the right direction that HMRC has recognised that action needs to be taken. There is still a long way to go though in order to achieve their policy objective of encouraging R&D and delivering a proportionate, fair and consistent treatment of taxpayers and agents.
Cowgills are experts in R&D tax relief claims, with over 15 years’ experience in reviewing, managing, and submitting successful claims for all sizes of organisations. If you have any questions on the above or making a claim, get in touch.
Disclaimer
The information was correct at time of publishing but may now be out of date.
