HM Revenue & Customs (HMRC) has intensified its scrutiny on research and development (R&D) tax relief claims. Here we explore some commonly asked questions around HMRC enquiries, additional information forms and the newly merged scheme.
HMRC estimates that the levels of ‘error and fraud’ in claims for research and development tax relief over both the small and medium sized enterprise (SME) and the research and development expenditure credit (RDEC) schemes for 2020-21 is 16.7% (£1.13bn), with the majority of this non-compliance being in the SME scheme, where error and fraud for 2020-21 is estimated as 24.4%. This is only expected to increase in the subsequent tax years.
As a result, the Government has made drastic changes to the R&D tax relief schemes during the last year, with further amends from April 2024.
As HMRC continues to review and enquire into a significantly higher level of R&D tax relief claims, our experts have answered some of the most frequently asked questions to provide some guidance and dispel any myths or confusion.
What is a HMRC compliance check?
Based on a recent report from the House of Commons, it is estimated that HMRC is now launching enquiries into 20% of R&D tax relief submissions – a considerable increase on the previous rate of around 1% of claims.
Enquiries, also known as compliance checks, involve HMRC opening an investigation into the eligibility of R&D tax claims. This enables HMRC to determine whether a claim includes any project activities that do not meet the criteria, lists any ineligible costs or is otherwise non-compliant with government legislation. They often last for several months and can be highly time-consuming.
There may be several reasons why HMRC might launch an enquiry, however, the most commonly occurring circumstances are:
- HMRC believes a submission may contain elements which are not eligible for relief.
- As part of HMRC’s volume approach to ensuring compliance, the company submitting the claim falls within certain parameters which HMRC has deemed worthy of further investigation. For example, the sector in which the company operates.
- The company has been selected by HMRC for a random check designed to investigate the levels of fraud and error as part of HMRC’s mandatory random enquiry programme (MREP).
What should companies do if they receive a letter from HMRC?
Firstly, don’t ignore it. The letter will contain a date that companies need to respond by, usually 30 days, but make sure to check the date as the letter could have taken a few days to arrive in the post. The letter is the start of an HMRC enquiry and the most important thing at this point is to treat the matter with urgency.
Take time to read and understand what information HMRC requires and the course of action it is proposing.
If companies are working with an R&D adviser, we recommend they consult them on receipt of the letter to ensure they are aware and can assist with a course of action to respond.
What should companies do if HMRC cancels the R&D tax relief claim despite responding to the enquiry?
If a company wants to contest HMRC’s decision, as it believes the claim is valid and meets the scheme’s requirements, we recommend seeking expert advice on the original R&D tax relief submission.
A reputable R&D adviser will have the ability to carry out a full-scale review of the original claim submitted to HMRC and assess the technological development element to ensure this not only meets the qualifying criteria but also has been explained in the claim submission accurately. Once the qualifying projects have been confirmed, a review of the financials will take place to ensure the tax benefit claimed was correct.
If the original claim submission was not prepared with sufficient detail, the adviser can rework the claim to support with appealing the decision from HMRC. Be aware that the adviser may review the claim and advise to withdraw aspects or concede the claim if it does not meet the qualifying rules. If this is the case, they can help you build a response to HMRC.
If HMRC has declared that a claim is invalid, companies can appeal the decision by writing to HMRC within 30 days of receiving the outcome. Other options are available, including an independent statutory review, alternative dispute resolution (ADR), or an appeal to the tax tribunal. Again, we would recommend seeking professional advice before doing so as this may have cost implications.
Can HMRC ask businesses to repay monies already received?
If HMRC is not satisfied that a company’s projects meet the R&D tax scheme qualifying conditions, then the claim will be rejected. For some companies, this could mean paying back any benefit already received. For example, if a R&D claim led to a reduction in the company’s Corporation Tax paid in that accounting year, the tax reduction would now be payable to HMRC. There have also been many cases where HMRC has processed the R&D tax credit payment before opening an enquiry and sought to retrieve the funds as the claim is not valid.
There is also the added risk that HMRC is likely to seek to apply a penalty to the claim. The penalty is calculated as a percentage of the extra tax that becomes due when the mistake or inaccuracy has been corrected and can be up to 100% of the tax benefit rejected by HMRC. The percentage that applies will depend on the type of error and when and how HMRC found out about it. If it can be shown that reasonable care has been taken in the claim’s preparation, HMRC may choose to apply a penalty of ‘nil’. In some circumstances, penalties may be suspended.
What should companies do if the advice received from an adviser was not correct?
If companies have any concerns regarding the advice received, it is sensible to get a second opinion from a trusted reputable R&D adviser. Unfortunately, during HMRC’s review of the R&D schemes it has identified that many companies have received poor advice regarding their claims. We have reviewed several claims where it is apparent the client has been misled into believing that the work they undertook qualifies for the R&D tax relief scheme. The tax system often works on a ‘pay now, check later basis’, so just because a claim has been paid previously by HMRC does not mean it has been accepted for this application.
What if the adviser is not prepared to help businesses?
Many R&D tax advisers will be able to assist with a HMRC enquiry, providing support through the process and defending the claim that they have prepared with the company. Depending on the contract with the R&D adviser, they may charge for this support. We recommend checking this before starting any further work with them.
If the adviser responsible for the preparation of the claim is only prepared to assist on a limited basis, or not at all, it is advisable to engage with another trusted reputable R&D adviser that has the experience of dealing with enquires and can advise on the next course of action.
What is an ‘additional information form’ and is it mandatory?
From 8 August 2023, HMRC requires an additional information form (AIF) for all R&D tax relief claims (both SME and RDEC schemes) to be submitted no later than the same day as your Corporation Tax return.
The AIF was introduced by HMRC to ensure that the required level of detail is submitted with R&D claims to enable a quicker and more efficient review process.
Essential information required for the AIF:
- Company essentials: Your Unique Taxpayer Reference (UTR), PAYE reference number, VAT registration and SIC code.
- Claim periods: Start and end dates of the accounting period for the claim matching your company tax return.
- Relief type: Whether you’re claiming SME, RDEC, or both.
- Expenditure summary: Breakdown of qualifying expenditure, including indirect activities.
- Project particulars: Number of projects, detailed descriptions, details of the company’s competent professionals and qualifying expenditure per project.
The project descriptions will need to highlight the field of science or technology, the baseline knowledge at the project’s inception, and the advancements aimed to achieve. It also provides opportunity to identify the uncertainties the team faced, and the methodologies employed to overcome them.
The changes aim to ensure that businesses not only comply with the latest regulations but that they also accurately claim the benefits due for their innovative activities.
What is the new merged scheme?
The Government announced a significant overhaul of the R&D tax relief system, with a merger of the SME and the RDEC schemes into a single, consolidated framework. This change, effective for accounting year starting on or after 1 April 2024, aims to streamline the process and broaden the benefits for companies engaged in innovative activities.
Currently, the RDEC and SME schemes have different rules and benefits, however, these schemes have now been amalgamated into a single framework to simplify the process. At the centre of this reform is the transition to a system where all R&D relief claimants will receive benefits through a taxable credit.
The key points of the merged scheme include:
- The tax credit rate offered under the new scheme will be set at the previous RDEC scheme rate of 20%. For loss-making companies, the notional tax rate of 19% will apply rather than the 25% main rate set in the current RDEC scheme, which boosts the benefit.
- The merged scheme will adopt the more generous PAYE/ NIC cap from the previous SME regime.
- The rules around sub-contracted R&D will mostly mean that companies who have had the R&D work contracted to them to perform won’t be able to claim. Companies should carefully consider their position in any supply chain to determine the correct claimant under the new merged scheme rules.
- A procedural change is the requirement that R&D credit payments must be made directly to the claimant company, rather than a nominee such as an adviser.
R&D intensive loss-making SMEs
For expenditure incurred on or after 1 April 2023, loss-making R&D intensive SMEs have been eligible for an expenditure enhancement of 86% and a payable credit of 14.5%. If the company is spending 40% or more of their total business expenditure on R&D, and are loss-making for tax purposes, then they qualify for the enhanced rate. For accounting periods beginning on or after 1 April 2024, the rate of total expenditure relaxes to 30% or more.
The current restrictions around subsidised R&D will be removed for R&D intensive SMEs for accounting periods beginning on or after 1 April 2024.
How can Gateley Capitus help?
If a company, or an accountant whose client has been claiming R&D tax credits, has any concerns either about the validity of the R&D claim or about the R&D adviser engaged to prepare their R&D claim, our R&D tax specialists and Gateley Legal teams can support you in a number of different ways including the following:
- reviewing previous R&D claims to ‘sense check’ them for eligibility and robustness
- explaining the company’s own responsibilities regarding the claim
- help with responding to a HMRC enquiry or rejection of claim letters
- providing support regarding contracts with sub-contractors/ suppliers to ensure the R&D tax is claimable by the right company
- advising on litigation or other options against R&D advisers who may have acted negligently or breached their contractual obligations, where appropriate.
We offer advice and support to businesses who are carrying out legitimate R&D activities but may have been inadvertently and adversely affected by HMRC’s current determination to address fraud and inaccuracies in the R&D tax credits scheme.