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20% of R&D Tax Claims Face HMRC Enquiry

New government report reveals the extent of HMRC’s compliance crackdown. 

HMRC is now launching enquiries into one in five R&D Tax Relief submissions, a twenty-fold increase on the agency’s historic enquiry rate of “around 1%”, a new report from the House of Commons has revealed.

Enquiries, also known as compliance checks, are investigations into an R&D Tax claim’s eligibility. They often last several months, are highly time-consuming, and can lead to funding reductions and reputational damage. 

Based on HMRC’s most recent statistics report, a 20% enquiry rate would translate to 18,000 investigations per year, an astonishing volume that speaks to HMRC’s determination to get R&D Tax compliance under control.

Why has HMRC increased the number of enquiries?

HMRC has stepped up its compliance measures to tackle a sharp rise in the number of non-compliant filings, especially among SMEs.

In its 2022 to 2023 annual report and accounts, HMRC estimated that error and fraud accounted for 16.7% of the funding paid out by the R&D Tax scheme during the 2020/21 tax year, costing the taxpayer £1.13 billion. In a recent letter to the Chartered Institute of Taxation (CIOT), the agency said it believes that half of R&D Tax claims are partially or wholly ineligible for relief.

In response, HMRC has embarked on a ‘compliance crackdown’ comprising various measures designed to identify and investigate ineligible claims. Besides expanding its enquiry programme, these measures include sending letters from its Anti-Abuse Unit, removing claims it deems “clearly not to be valid” from companies’ tax returns, and immediately rejecting claims that do not include the additional information form, a mandatory accompaniment to all filings as of 8 August 2023. 

Some of HMRC’s measures have become so extreme that the CIOT has stated they “could amount to an abuse of power”.

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The different types of enquiries

Enquiries investigate whether a claim contains ineligible costs or projects and is otherwise compliant with government legislation.

HMRC launches enquiries for three reasons: 

  • Because a tax agent believes a submission contains elements which are not eligible for relief
  • As part of its volume approach to compliance, which targets enquiries at companies that meet certain criteria
  • Randomly, as part of its mandatory random enquiry programme (MREP), designed to investigate levels of fraud and error

Most investigations are handled either by the Individual and Small Business Compliance (ISBC) Directorate or the Wealthy and Mid-sized Business Compliance (WMBC) Directorate. 

According to the CIOT, almost all enquiries handled by the WMBC “result in an R&D tax relief claim being agreed”, while the “vast majority” of ISBC enquiries “result in a rejection of the whole R&D tax relief claim.”

The CIOT believes that this is resulting in legitimate claims being rejected and that HMRC’s approach is putting companies off claiming relief, undermining the fundamental purpose of the R&D Tax Relief scheme. 

In the House of Commons report, HMRC said it needs to “listen to feedback from its customers” and that it hopes the new information requirements–those necessitated by the additional information form–will help it “better target its compliance checks.”

How can I avoid an HMRC enquiry?

The best way to avoid an HMRC enquiry is to make sure your claim only includes compliant costs or projects and that it reflects all the latest legislation. This has become a lot more challenging due to the government making a number of sweeping changes to the scheme in recent months.

You also need to make sure you effectively demonstrate that your projects satisfy the government’s definition of R&D for tax purposes in the technical section of the additional information form. This requires technical expertise and the ability to translate complex technical concepts into language HMRC’s generally non-technical inspectors can understand. 

If you want help making sure your next claim is compliant, GrantTree’s R&D Tax specialists are standing by to help. Just get in touch!