GrantTree Director Will Fraser explains why R&D Tax Credit enquiries are rising again and what you can do to protect your business from a time-consuming investigation.
In the last few weeks, we have seen a marked increase in the number of R&D Tax Credits enquiries launched by HMRC.
For those who don’t know, an HMRC enquiry or ‘compliance check’ is an investigation into the accuracy and legitimacy of your R&D Tax Credits claim.
Enquiries can last for several months or even years, delaying your funding and occupying your finance and technical teams.
This blog will explain what enquiries are, why they are rising, and how you can minimise your chances of facing one.
What is an R&D Tax Credits enquiry?
An enquiry is an audit of your R&D Tax Credits claim.
HMRC’s goal during an enquiry is to work out whether your claim is valid and accurate. Your goal during an enquiry is to justify your claim size and resolve the investigation as fast as possible.
Enquiries can last anywhere from a few months to several years.
The longer your compliance check drags on, the longer you’ll wait for your cash credit or tax relief. And the more time your finance and technical teams will have to spend defending your claim to HMRC.
If HMRC concludes your claim is inaccurate, they will almost certainly decrease your claim size. This could cost your company thousands in government funding.
HMRC can also fine you and launch enquiries against your previous R&D Tax Credits claims, going back up to seven years.
Why are R&D Tax Credits enquiries rising?
R&D Tax Credits enquiries are increasing for three reasons.
Reason 1: Unscrupulous R&D Tax Credits providers
The first is down to the rise of unscrupulous R&D Tax Credits providers.
These firms either unknowingly or even willingly submit claims that are either too large or completely invalid on behalf of unsuspecting clients.
In recent years, HMRC has become increasingly aware of these agencies. This has caused them to become much more suspicious of R&D Tax Credits claims generally.
To make matters worse, these providers refuse to help their clients during an HMRC enquiry. Even though the enquiry resulted from their risky practices.
We have seen providers rack up enquiries with their clients and simply shut down the company rather than deal with them. Even more worryingly, we have seen instances where a provider will close down and then open up a new company almost instantly to do the same again.
Respectable specialists stand by their work. That’s why we offer all of our R&D Tax Credits clients free Enquiry Defence as part of our service.
Reason 2: More HMRC resources
Another reason is that HMRC now has more resources to investigate R&D Tax Credits it finds suspicious. This is thanks to the government hiring 1,300 new HMRC staff tasked with improving tax compliance and reducing avoidance.
With hundreds of new staff joining its ranks – many of them first-time tax inspectors – HMRC has been able to dedicate more resources to stamping out ineligible claims.
Reason 3: The time of the year
The last reason is the most benign: lots of tax years have just finished.
December to May is HMRC’s busy period. This is where it processes more corporate tax filings and R&D claims than at any other time of year, this means enquiries open up as the claims are reviewed into the summer.
It’s also when the agency takes the longest to process R&D Tax Credits claims – a backlog you can avoid with R&D Advance Funding.
More R&D claims means more enquiries. And more headaches for finance teams across the UK.
If you’re worried about facing an enquiry, contact Granttree’s Enquiry Defence team.
Our team can quickly assess your claim to determine your likelihood of facing a compliance check.
They can also defend your claim once the enquiry is launched.
What happens during an R&D Tax Credits enquiry?
The structure of an enquiry varies from company to company. However, here are the main things you can expect to happen during your compliance check.
All enquiries start with a letter informing you that HMRC is launching a compliance check into your R&D Tax Credits claim.
Your enquiry letter will contain a list of questions about your claim, covering areas of your financial filing and development work. You must respond within 30 days of the letter being generated.
You may also receive a nudge letter before your enquiry letter. A nudge letter asks you whether your company’s financial statements are up to date. If you receive a nudge letter, get ready. An enquiry may be close behind.
If your tax inspector is happy with your response to its initial letter, they may end the enquiry then and there. Unfortunately, this only happens in a small number of cases. Usually, your inspector will have follow-up questions that they’ll ask in follow-up letters or an interview with your finance and technical teams.
The two-to-three-hour interview will be hosted by your tax inspector. They may also bring along other resources such as members of their contracting development team – to dig deeper into your development work.
Enquiry interviews aren’t antagonistic. But the pressure is on to prove the validity of your claim.
Handle the interview well, and you can put your enquiry to bed and focus back on development. Mismanage it, and you could weaken your inspector’s trust, lessening the chances they will accept your case.
Conclusion and appeals
After the interview, the HMRC inspector will write to you with their conclusions.
If you’ve defended your claim successfully, the inspector will confirm that your application for R&D Tax Credits can proceed without a claim reduction.
However, if you haven’t been successful, your inspector will explain which of your projects have been disqualified. This could significantly decrease your claim.
If HMRC is looking to disqualify your development work, you have two options. You can appeal, delaying your payout further but hopefully returning your claim size to the full amount. Or you could accept the decision and take a smaller payout sooner.
Building a productive relationship with HMRC
Defending your claim during a compliance check is often challenging. But that’s not to say HMRC inspectors are vindictive or consciously set out to deprive your company of funding.
In fact, we’ve found inspectors to be genuinely interested in exploring our client’s claims and their development work. This is why we recommend a more open and diplomatic tact.
How can I avoid an R&D Tax Credits enquiry?
R&D Tax Credits enquiries can be extremely time-consuming, disruptive and costly.
If you don’t want your technical and financial teams embroiled in months-long back-and-forths with tax inspectors, it’s best to do things correctly the first time.
The best way to avoid an R&D Tax Credits compliance check is to file a fully compliant justified by a watertight technical and financial information on your additional information form.
The easiest way to do this is to ensure your claim is compliant by working with an experienced R&D Tax Credits specialist like GrantTree.
Worried about facing an R&D Tax Credits enquiry?
If you’re concerned about facing an R&D Tax Credits enquiry – or have already received your enquiry or nudge letter – help is at hand.
Calling on decades of experience, GrantTree’s specialist Enquiry Defence team will handle your enquiry from start to finish, protecting your claim size, minimising disruption to your business, and giving you peace of mind when you need it most.