R&D Tax Credits: HMRC Audits and Enquiries

Recently, a potential client we were speaking to was confused about what an “HMRC Enquiry” means in the context of an R&D Tax Credit claim.

Getting audited by HMRC sounds really scary, of course, especially if you’re planning on filing R&D Tax Credits yourself, so waving the threat of an “enquiry” would be a great way to convince clients to sign up with a specialist firm. However, we believe that our service is valuable even without the vague threat of an undefined “enquiry”, so here’s a clear outline of what typically happens when HMRC receives your R&D Tax Credit claim and have questions.

The default case: everything goes fine

If the claim has been prepared competently, and doesn’t include any “attention-grabbing” mistakes (like claiming a percentage that’s unnaturally high for your industry), it will probably sail through.

This happens to most of the claims that we’ve filed at GrantTree. It is relatively rare for HMRC to have questions about a well presented, well explained, clear and reasonable claim.

A likely case: “written enquiries”

The most common form of enquiry we encounter is a list of written questions from HMRC. They have a set of standard questions that can ask, but sometimes they are tailored slightly, indicating where HMRC are looking for a bit more information.

It’s best to give them a call to clarify the parts they are most interested in and to make sure that you directly address their concerns, to avoid an unnecessary back and forth.

These types of enquiries can still take many responses to be resolved as HMRC have more questions through the process. This means it can take quite a long time (possibly even over a year) to resolve the enquiry. On the other hand, we have experienced enquiries being resolved in the first response, in just a few months.

Less likely: “we’d like to meet you”

The next step up, which happens more frequently with first-time claimants, is that HMRC wants to come and meet the company in person. This is, again, a friendly meeting – at least it’s supposed to be.

When our clients end up meeting the client, we always explain in detail what might happen if HMRC decides to dig their claws in (to use a gentle metaphor), so they are prepared and understand how the scheme works, what is R&D, what HMRC’s likely lines of questioning are, etc.

However, usually this type of meeting should be very friendly and not concerned with pushing back on the claim.

Unless they find out that you misfiled part of the claim, the result of this meeting should be that the claim is approved and paid. If part of the claim has indeed been incorrectly filed, then HMRC would expect a corrected version to be sent before they pay out the money.

Even less likely: the aspect enquiry

If HMRC is quite certain that a substantial part of the claim is incorrect, then they are likely to launch into the next level up: an aspect enquiry.

This sounds more scary, and it should – it is now an official enquiry into an aspect of the Corporation Tax filing: the R&D Tax Credit aspect, specifically. This will always involve a formal meeting, with specific questions that HMRC wants answered before the meeting and during it.

That said, it still sounds more scary than it is. There’s a number of reasons why.

First of all, the meeting is not, should not be, need not be confrontational. In fact, it should always be seen as a collaborative effort. The claimant and the HMRC inspector are, together, trying to figure out what should have been claimed. Unless the claimed amount is patently ridiculous, HMRC will never walk into the meeting and start throwing accusations around. Strained arguments may (and do) occur in the course of the discussion, but they are not aimed at people, but at resolving the matter at hand.

Secondly, unless your claim really was completely spurious, the likely outcome will be that part of the amount will be accepted and part will be rejected. After all, you do have a valid R&D project, right? HMRC Inspectors are fairly pragmatic, and they will look to come to a reasonable conclusion (that fairly represents your project) within the duration of the meeting.

Finally, when they hear “HMRC Aspect Enquiry”, most people have visions of endless investigations, never-ending hassle, and HMRC progressively digging into every aspect of the company’s tax return. Actually, that is explicitly not the goal of the aspect enquiry – it is limited to a specific aspect. In the letter announcing the enquiry, HMRC do mention that they reserve the right to turn this into a full enquiry, of course, but unless your business is very shady indeed, that’s not going to happen. Obviously, if you’re running a money-laundering operation, misfiling a tax credit claim is a very, very bad idea – but I think that those few people insane enough to run money-laundering operations in the UK already know this.

Pragmatic HMRC

It’s somewhat unexpected to see these two words together, but HMRC inspectors from the R&D specialist units are actually a very pragmatic bunch (as opposed to dogmatic and inflexible, as they are often perceived). They’re not looking to scare companies into not filing, but they have a duty to the government to do their best to ensure that claim amounts fairly represent the R&D that’s been going on, according to HMRC’s elaborate definition.

So long as you take a similar view, and work with the inspector to dig out the truth, rather than against them, even an Aspect Enquiry need not be all that scary.