Increased claims scrutiny and the changing R&D tax market

Research and development (R&D) tax credits are undergoing transformation. Propelled by HMRC’s intensified scrutiny measures, this change aims to improve the integrity of the scheme, ensuring it fosters genuine innovation while curtailing the misuse by claimants on the fringes of the eligibility criteria.

Opening of enquiries by HMRC

The spike in HMRC’s enquiry rate over the past 12 months marks a significant shift, and is a cautionary tale for claimants, highlighting the importance of due diligence when selecting a R&D tax credits adviser. It also underlines the need for claimants to be prepared for potential HMRC enquiries and to ensure that their claims are robust and accurately prepared.

The reasons for an HMRC enquiry can vary, but certain triggers appear more common:

• Supporting documentation: Failing to provide adequate technical or financial information can lead to HMRC scrutinising your claim.
• Sector-specific focus: HMRC may concentrate on specific sectors or types of technology to ensure the consistent treatment of claims.
• Random sampling: HMRC seeks to understand the levels of non-compliance through its mandatory random enquiry program, which has unveiled that a significant amount of claims have failed to meet the required standards during recent tax years.
• Advisers being under review: HMRC appears to have targeted certain advisers due to it being flagged that they have prepared multiple R&D claims which have been deemed as invalid during compliance checks.

Unveiling the misconceptions of qualifying activity

The essence of R&D, for tax purposes, resides in pushing the boundaries of science and technology beyond the current state of knowledge. Over recent years, the perceived standard of qualifying activities appears to have dropped below the levels required for a valid claim. HMRC’s recent communications have identified several areas where companies are not at the level required and are in fact claiming for work that is deemed ‘deducible by a competent professional’. Companies need to remember that the R&D output being claimed for can’t just be new to them, it needs to be advancing a field of science or technology.

It’s important that businesses understand the definition of research and development for the scheme’s purposes to ensure R&D activities are correctly identified and claimed. Recently, we have had several instances where we have been asked to review R&D claims for companies and have had to explain that the activities listed do not meet the required levels to claim for R&D tax credits. Unfortunately, the advice being provided to these companies appears to be that any activity which is new or not routine qualifies, which is not the case.

The message from HMRC is clear: not all activities qualify as R&D under the tax relief criteria, and companies should tread carefully when approached with offers to claim tax credits for everyday business operations.

The implications of misguided advisers

The increased scrutiny of claims by HMRC has led to the departure of numerous advisers from the R&D tax industry. As a result, companies have been left in difficult situations where they need to provide HMRC with further information to substantiate their claim, but no longer have an adviser to assist with this.

Additionally, several advisers have advertised a ‘100% success rate with R&D claims’, however, as HMRC doesn’t review every single claim or confirm their acceptance, this is not factually correct. A claim can be submitted, and the benefit paid by HMRC without it being reviewed or agreed by HMRC. Such practices have now led to HMRC reviewing a higher number of claims.

Unfortunately, it leaves many companies in a situation where they will be asked to repay tax benefits to HMRC for claims that have already been paid to them, as on review the claim does not meet the scheme criteria. This can be a very stressful situation for businesses as they have taken advice from a third party and claimed in good faith only to be told the advice they received is incorrect. However, it’s worth noting that not all instances of HMRC requesting further information leads to a claim being declined as they may just require further information or clarification on a project before accepting the claim.

We would recommend that companies seek professional support from a trusted adviser if they have any concerns about a submitted or recently prepared claim, have received a letter from HMRC or their original adviser is no longer available.

Expert guidance from Gateley Capitus

At Gateley Capitus, our team maintains up-to-date knowledge of the evolving scheme guidelines and provides clarity and compliance throughout the claims process. Our team is able to utilise the experience of colleagues from across our wider Group, which includes a wealth of professionals from many different legal and advisory sectors.