In June 2022, HMRC reiterated their intent to increase the number of their compliance checks following a surge in irregular claim submissions. It is also clear that HMRC have been investing in greater resource via hiring more tax inspectors to facilitate this uptake in claim checks. It’s safe to assume therefore that enquiry rates are increasing for the foreseeable future. Bearing this in mind, detailed below is some insight into what the checks entail.
What is a ‘compliance check’?
The compliance checks seeks to answer 2 fundamental questions:
- Is the tax relief claim valid?
- Is the tax relief claim accurate? (i.e. Has the claimant company received the correct amount of tax relief, and has it paid the correct amount of tax?)
In doing so, they are ensuring that the funds set aside by the Treasury for R&D tax incentives are being appropriately distributed.
What does the check entail?
Checks will vary by case, as will the duration of the process. Generally, the process will include the following stages.
- A letter is issued explaining HMRC’s intention to undertake a check of the claimant company’s tax return. It will explain what is being checked, and why. Included with the letter will be a schedule of queries detailing the information and documents required to complete their check. A deadline will be stipulated by which time the information must be provided. Although the time given to respond can vary, generally they tend to allow a month.
Note: Deadline extensions can be requested but this is not ideal. They must be requested in writing, with as much advance notice as possible and with good reason. From personal experience, the disadvantage of requesting an extension is that the HMRC case worker is entitled to impose a ‘Schedule 36’ notice for information requested after granting the extension. This notice entitles HMRC to enforce penalties (starting at a £300 charge) where deadlines are not met and are becoming more common.
- There are likely to be a few rounds of written questions, each with a deadline. The extent of queries will vary by case.
- Where HMRC feel a call would be more productive, they might suggest a telephone conference call. This call would include the claimant company’s director(s), any relevant competent professionals, Reclaim Tax UK representatives, the HMRC case worker, a HMRC technical advisor and a note-taker from HMRC.
- After each call with/written response to HMRC, information is reviewed and the case worker responds with their conclusions. These can be challenged or accepted. It’s important to note that there is no stipulated limit on the number of calls or written queries HMRC can raise. Checks have varied in length from a few weeks to over a year.
- The check comes to an end when the case worker is satisfied that all the requisite information has been provided, their queries answered and where necessary a resolution has been reached. If the submission is found to valid and accurate, the check can be concluded without changes to the claim. In such case, a ‘closure notice’ is issued. On the other hand, where the claim is found to include errors, changes are required to the submission often resulting in a reduction of the tax benefit.
What can we do to help reduce the risk of enquiry?
HMRC are not transparent about the methodology applied to choosing how claims are chosen for checks, and do not publish data on the number of checks undertaken. From personal experience on enquiry work however, they are becoming more frequent and rigorous. The above demonstrates how lengthy and cumbersome the process can be.
Reclaim Tax UK will defend any claim we submit at no extra cost, unlike some other R&D tax consultants. We also have access to independent tax consultants should we need their input, their cost is not passed on to the claimant. Hence, it is costly to dedicate the time and resource to helping our clients see checks through to resolution.
With the above in mind, although there is no way of eliminating the risk of enquiry altogether, there are things we can do to reduce the risk of enquiry, and perhaps shorten the process.
- Obtaining financial documents as early in the process as possible, ideally prior to consultation. This enables us to begin our internal checks early on the company’s eligibility to claim for R&D tax relief, as well as raise any queries regarding validity when raising technical questions.
- Where appropriate, encourage clients to keep records on their R&D projects, which helps strengthen the submission by being able to provide evidence if asked to do so. These can include project timesheets, progress reports, invoices etc.
- Adapt our internal claim methodology and preparation process to learn from areas of potential improvement identified from the enquiry process.
- Identifying a project’s competent professional as early as possible in the claim process, ideally prior to consultation. (This is not always a company’s director. The person must be able to demonstrate their knowledge and experience in the respective field of science/ technology.) Early identification of the competent professional means we can maximise our technical questioning and assemble a stronger supporting narrative.
If any of your clients have received a letter from HMRC about their claim, speak to your manager today.