R&D Tax Credits expert Dr Chris Brown shares his top tips for avoiding an expensive and time-consuming HMRC enquiry.
HMRC doesn’t release figures on the number of investigations it is conducting. But the recent RDCC committee meeting – a twice-yearly exchange between HMRC and R&D Tax Credit consultants – confirmed our suspicions.
We are indeed witnessing an unprecedented increase in compliance checks.
For those that don’t know, a ‘compliance check’ or ‘enquiry’ is when HMRC launches an investigation into your company’s R&D Tax Credit filing.
Enquiries are often preceded by a nudge letter. This is where a tax inspector writes to your company asking for extra information about your claim.
Enquiries, to put it plainly, are bad news for your business.
They typically take 40 to 60 hours to resolve. And are likely to monopolise your senior financial and technical people for weeks or months on end.
Even if you successfully defend your claim, a compliance check can still delay your cash credit or tax relief by several months or even years.
Why are enquiries rising?
As I explained in my previous article, HMRC recently recruited more than 1,300 new staff to expand its ability to pursue tax collection and avoidance.
HMRC and the government have to tackle abusive R&D Tax Credit claims, such as those looking to funnel government subsidies overseas, for a long time. These new recruits have given the agency the capacity to do just that.
But it’s not just fraudulent or abusive claims that are receiving extra scrutiny. Tax inspectors are also going after filings with unclear technical explanations and minor financial errors.
The end result is that a growing number of submissions – especially those lacking watertight technical and financial data – are attracting unwanted attention from HMRC.
Despite all this doom and gloom, I do have some good news for you. There is a range of things you can do to avoid an HMRC enquiry. And speed up your R&D Tax Credits payment.
Here, based on my experience filing hundreds of fully compliant R&D Tax Credits claims and almost five years spent working for a provider with one of the lowest enquiry rates in the industry, is my best advice for avoiding a compliance check.
1) Account for every penny
One of the easiest ways to land yourself with an enquiry is by submitting financial information that doesn’t add up.
Claiming £50,000 worth of subcontractor costs when there’s only £30,000 against ‘subcontractors’ on your P&L, for instance.
These simple errors are easy to avoid. But there’s no bigger red flag to tax inspectors than numbers that don’t look right.
Before filing your claim with HMRC, go through your figures with a fine-tooth comb and triple-check that they tally with your P&L, tax computations and CT600.
It’s also a good idea to tie the length of your technical narrative to the monetary size of the claim. For example, if one of your projects was particularly expensive, you should dedicate more space to it in your narrative.
2) Use the right terminology
To secure R&D Tax Relief, you must now submit an additional information form containing a range of financial and technical data about your development work.
This includes an explanation of the advance you were seeking and the uncertainties you encountered. These terms may sound familiar but they are specific to R&D Tax Relief.
When preparing this aspect of the additional information form, it’s important to use these terms, and others required to demonstrate your projects’ eligibility, correctly. For example, consider that advances must be technical in nature.
Learning how to repackage a product is neither a scientific nor a technical problem. But creating a paint with a unique chemical makeup to give the package a specific colour would qualify.
If you don’t use these terms correctly, your tax inspector will not be able to determine whether your projects qualify for R&D Tax Relief. This confusion can easily trigger an enquiry.
3) Make your tax inspector’s job easy
Another way to avoid an HMRC enquiry is to keep your end-user in mind.
Your end user being your tax inspector.
The key is to make it as easy as possible for your inspector to understand your development work. This means writing your technical narrative in a way that a non-technical person can understand.
Remember, HMRC needs to understand the problems you encountered and how you solved them. Esoteric language and difficult data will stop them from doing that.
Learning how to explain complex development work in a clear and concise fashion takes years of practice. And a keen understanding of the science or technical theory underpinning your R&D.
That’s why, if you want to submit a clear, watertight technical narrative to HMRC, the best thing to do is work with an R&D Tax Specialist like GrantTree.
4) Collect the right data
Like many companies, you might find the idea of having one of your developers or engineers spending hours on your technical narrative completely unthinkable. In which case, you may ask a member of your finance team, or your external accountant, to take on the responsibility instead.
If someone without a technical background is writing your narrative, you need to equip them with the right data. This means data that demonstrates the true extent of your technical journey, the obstacles you encountered, and how you overcame them.
My advice is to make a single member of your technical team responsible for collecting all the necessary data. Ideally someone directly involved in the R&D.
They will be much better placed to identify the industry analyses, development reports and experimental results that can reinforce your company’s eligibility for R&D Tax Credits.
If you do end up facing a compliance check, this technical person can also form part of your enquiry defence team, collecting information to answer HMRC’s follow up questions.
Bonus Tip: Use an R&D Tax Credit specialist
By far, the simplest and least stressful way to avoid an HMRC enquiry is to work with an R&D Tax Credits specialist.
Companies like GrantTree have teams of experienced tax and technical experts who know the R&D Tax Relief scheme inside and out.
We will make your claim fully compliant with all the latest legislation and prepare all the technical and financial information required on your additional information form.
In the unlikely event that the claim we produce for you is enquired, our free Enquiry Defence service will manage the process from start to finish, handling all negotiations with the R&D Tax Unit while strengthening your relationship with HMRC.