Since it was identified that the R&D tax relief schemes have been subject to high levels of error and fraud, HMRC has introduced a range of measures to reduce non-compliance. This includes a large increase in the number of enquiries being raised as potential causes for query which may have previously gone unnoticed are now being flagged up and checked.
In addition to enquiries being raised because additional information is required to clarify an area of discrepancy, claims can also be selected at random for compliance checking. Whilst this makes it impossible to definitively prevent an enquiry, there are steps you can take to avoid a HMRC enquiry that isn’t randomly generated.
Clarity is Key in Claim Justification
When preparing a claim for R&D Tax Credits it is essential to provide HMRC with sufficient information to allow them to determine that qualifying R&D was carried out and to show how you have calculated the relief due. HMRC openly state that the officers who handle claims are not scientific or technological experts, so the detail claimants supply needs to give clear explanation that does not demonstrate any misunderstanding or raise concern.
Since August 2023 it has also been a mandatory requirement for an Additional Information Form (AIF) to be completed and submitted online prior to the submission of a company’s corporation tax return. This form requires very specific information about the R&D projects undertaken which should make it clear to HMRC how the activities you are claiming for are eligible for relief. To further back-up the validity of your claim, you can also submit a separate R&D report to provide wider detail.
Common Errors to Avoid When Preparing a Claim
Whilst there is no definitive method to preparing a claim that can guarantee it won’t be subject to an enquiry, claimants can ensure their claim is water-tight by avoiding the most common pitfalls.
With so many reforms in recent years, it’s also paramount for businesses to check their claims comply with the specific guidelines applicable to the accounting period for which they are claiming. This is due to the introduction of new rates and rules which are effective from different dates.
HMRC cite the following factors as to why an enquiry may be raised during the risk assessment process of a claim:
- no analysis of how the relief shown has been arrived at
- arithmetic or typographic errors
- business operates in sector where R&D doesn’t usually take place (this can often be flagged up due to a generic or inaccurate SIC code)
- project activities outside scope of R&D for tax purposes (not in line with BEIS guidelines)
- expenditure outside qualifying categories is claimed
- expenditure claimed on item for period before it was in a qualifying category
- staffing costs claimed in respect of people who aren’t employees of company
- claims made for overheads that don’t qualify as consumable items or consumable stores
- special rules for connected parties not applied
- solvency of company may make it difficult to recover money paid out or owed if claim is incorrect
For SMEs only:
- companies don’t recognise they aren’t classed as SMEs for R&D relief purposes
- failure to make claims under the Large Company Scheme where applicable
- loss previously surrendered for payable tax credit is carried forward
- unconnected subcontractor expenses not restricted to 65%
- amount of surrenderable loss for purposes of payable tax credit not restricted to permitted percentage of qualifying expenditure
- payable tax credit claim made for expenditure that only qualifies under large company scheme
- no account taken of subsidies or Notified State Aid
Note that following recent rule changes, some of the above factors are not applicable to R&D activities undertaken in accounting periods beginning on or after 1st April 2024.
HMRC Enquiry Support
HMRC recognises that high-quality advice from agents can enable businesses to get their claims right. With a team of highly experienced technical specialists, R&D Funding Group has a wealth of experience in supporting businesses through a HMRC enquiry. Whether you want a second opinion to check your claim is robust prior to submission or you need full support with an enquiry, we can help. Further information can be found here.
Where R&D Funding Group has prepared your claim for R&D Tax Credits, full enquiry support is provided at no additional cost.