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R&D tax credits: new HMRC approach, new risks

If HMRC do not follow the standard enquiry procedures what happens then?

Author: John O'Donnell

This is the problem that many company directors are encountering in relation to their R&D tax relief claim. HMRC have sent letters to company directors which are almost identical to the type of letter you would expect to see at the opening of an enquiry but interestingly these are not being conducted under the statutory enquiry regime. HMRC are typically requesting a categorisation of costs, bank statements and technical explanations in relation to projects included within the R&D claim, all of which you would expect to provide during a formal enquiry.

However, this is not an HMRC enquiry notification letter (i.e., a formal enquiry notice issued under Paragraph 24 Sch 18 FA 1998). Furthermore, the letters are being issued by HMRC’s Fraud Investigation Service and the letter explicitly states that they believe the claim has been made fraudulently.

The consequences of this can be significant. If we consider the protections that you and your client receive during formal enquiry proceedings, such as holding HMRC to account over processes and final decisions, accessing support throughout the process and potentially triggering a claimable event in relation Fee Protection Insurance, then there would seem very little to gain from engaging with HMRC outside of the statutory enquiry framework.

The HMRC letter includes strong language to encourage engagement on an informal basis, indeed one paragraph states that “HMRC have not yet opened a criminal investigation into this suspected fraud…[but] you should be aware that [they] reserve the right to do so” which can be seen as a veiled threat. However, there is no reason for you or your client to engage further on an informal basis.

The Self-Assessment Tax Regime contains statuary enquiry provisions for HMRC compliance checks, more commonly referred to as tax enquiries or investigations, which are long established and in place for a reason. During an enquiry, there are certain safeguards within the process which exist to ensure taxpayers are treated fairly and properly. These include:

  • access to additional support from HMRC if there are health or personal circumstances that make dealing with the enquiry difficult
  • the right to speak to the officer dealing with the case if there are any questions or concerns
  • the right to challenge HMRC’s requests for information where appropriate
  • the right to appeal any decisions made or assessments raised

We would therefore suggest that the sensible action to take in these situations is to write to HMRC explaining your client’s willingness to cooperate with any enquiry as long as it is conducted via the correct process. Once the formal enquiry notice is issued, your client has the protections that are set out above - this would be a good direction to reactively steer your client in if one of these informal letters arrives.

Most importantly to your client, and perhaps to you as their advisor, is the issue of a formal enquiry notice, without which, any work undertaken dealing with HMRC may not be covered by Fee Protection Insurance. Where a claim is accepted under your Fee Protection Insurance Policy, the costs of dealing with the formal enquiry will be covered, subject to normal T & C’s. Furthermore, you will also be able to access support through helplines and specialist experts who can guide you through any enquiry, regardless of the complexity.

Once the enquiry process has been completed, your client will receive a closure notice explaining the final position as well as setting out HMRC’s view on the penalty position. There is then an appeal period of 30 days to allow any disputed areas to be resolved and once a final agreement is reached on all points, matters will be formally concluded, and you and your client can move on.

The whole enquiry process can be very stressful for your client and incredibly time consuming for all concerned. Furthermore, where the client under investigation is uninsured it can be incredibly costly.

It’s vitally important in any HMRC enquiry to have the best representation to ensure the best protection during the enquiry process in order to secure the best possible outcome as smoothly as possible. HMRC may seek to charge penalties for the failure to comply with certain request for documents and particulars and so it is important that all requests from HMRC are reviewed in detail to ensure they are reasonable and relevant to the period under review. Where appropriate, an unreasonable request can be challenged.

This new HMRC approach has been largely driven by the concern with the increased number of R&D claims submitted. Anecdotally, the increase in R&D claims has arisen from relatively new R&D providers to the market and HMRC feel the veracity of many claims is questionable, which could explain the reason why HMRC Fraud Investigation Service are involved.

To proactively address the issues raised above, we are offering a complete and confidential file review process to Markel Fee Protection clients where we can assess which of your clients could benefit from a conversation on R&D. We can help you with the messaging to contact the identified clients and start the conversation with them sooner rather than later, effectively shutting the door to cold callers who will look to engage with them directly to make submissions to HMRC. Further to this, if you partner with Markel for the creation and submission of R&D claims, we will manage any HMRC activity at no additional cost to you or your client, entirely removing the issue of whether this new approach from HMRC falls within the scope of your Fee Protection policy.

To discuss this in more detail and to learn more about the changing landscape of HMRC’s approach to R&D enquiries, please email or call +44 (0) 7990 346 153.