Since the start of the year, the R&D Tax Credits industry has been shaken to its core by a significant increase in the number of enquiries being opened by HMRC and to a certain extent the ultra-aggressive stance taken by HMRC when it comes to those enquiries into R&D Claims. Even seasoned professionals like myself and other leaders within the R&D Tax Relief industry who have been supporting claims for almost the entirety of the relief’s existence are worried about where this is heading.
In earlier years HMRC had a network of regional areas of expertise in their R&D Units, these have pretty much been disbanded and centralized, whilst some of those remain, many have left HMRC and have gone from being the gamekeeper to the poacher, provided their knowledge to support companies preparing claims. Those HMRC Inspectors were the backbone of the investigative teams within the R&D Units had “specialized” in a particular industry, but they weren’t technically competent professionals. They had benefitted from a number of years of training and it felt like they had a reasonably sound understanding of some of the more technical elements of their area of specialty and a sound knowledge of the CIRD guidelines built up over a number of years supporting previous Inspectors.
Why the change in tack?
Well, this would appear to be a knee jerk reaction to the criticism levelled against the organization during the House of Lords debate on the 2022 Finance Bill towards the end of last year, which took evidence from a number of senior figures from within the Science and Technology community, representatives of the accountancy and tax professionals and a couple of representatives from the R&D Tax Credits Industry. This followed a number of articles by The Times newspaper which highlighted a number of issues with claims being made by companies for such things as Blueberry Croissants, Vegan Menus and reduced temperatures on Launderette washing machines. It also follows the suspected fraudulent abuse of the scheme which saw 8 people, including a tax advisor sent to prison for their roles in a £16m attack involving sham claims for R&D Tax Relief.
Since the pandemic, HMRC have also recruited around 200 new “Case Workers”. These case workers have had 12 – 18 months of training and education in the R&D Tax Credits Scheme Rule book, the Corporate Intangibles and Research and Development (CIRD) Guidelines. They have come from a variety of backgrounds but from anecdotal evidence and a little bit of first-hand experience, that experience is not generally from an Industrial, Mechanical or Technologically focused role
As highlighted, this is not new, however, the original inspectors had a lot more experience being involved in enquiries before rising to their lofty positions of responsibility and running their own enquires, they also had a strong network of support, and they weren’t remunerated based on the successful outcome of their enquiries. That is not the case today, the latter is based on supposition, but a number of my fellow professionals believe this to be the case.
The approach to enquiries also appears to have changed significantly. In the past it has always felt as though enquiries were a collaborative approach to ensure that the taxpayer (and the advisor, if there was one) understood the eligibility criteria and that the competent professionals within the company, were able to demonstrate their competence and understood the boundaries of their R&D projects. They would also then be discussing the financial elements and challenging percentages and costs to determine they met the eligibility criteria. Finally, after several weeks of back and forth, If errors were found, there was always a rather mumbled apology along the lines of “well we have found an error, we will have to discuss penalties with you, but you’ve worked with us, If you can provide us with evidence that you can prevent it happening again, then we can probably waive those in this instance.” It was all rather softly, softly and more of an educational experience.
Today’s approach seems to be a blanket “it’s not eligible” and as a result we are going to be charging a penalty, here’s how we calculate penalties. It is also a lot more combative and it’s often not because HMRC are coming from a position of strength. They are often relying on a company fearing penalties and being unwilling to take them to a Tribunal, which is an expensive affair and often more costly than the tax benefit being claimed.
Is it all about combatting fraud and error?
It feels like they are using this fear to prove that there is extensive fraud and error in the SME scheme and use this evidence as the driving reason to harmonise the two schemes into the RDEC scheme.
Granted there is fraud and error within the schemes, they are highly complex and there is clearly evidence of boundary pushing. Some of the other changes like the claim being approved by a senior leader/competent professional, a templated R&D form, pre-notification of an intent to claim, will all go someway to combatting this, but it won’t stop everything.
Having previously reviewed a claim by a top 10 firm of accountants who had used sampling to review a number of projects, they claimed for about 75% of projects, on closer review of each of the projects in the following year, our detailed review established that only around 40% of projects were eligible and this was for a large international company claiming under RDEC, so it is not just limited to the SME scheme or to small consultancy firms seeking to jump on the R&D Tax Credits Gravy Train, it exists in the higher echelons of the accountancy industry.
How to deal with an enquiry?
If you have prepared you own claim and you do get an enquiry, if you have prepared it diligently, don’t panic answer the questions honestly and openly and if you really are worried consult a professional advisor, they might be able to help you, but do it sooner rather than later.
Even if you have prepared a technical report to justify the claim, try not to respond out of frustration “please read the technical report previously submitted”. Whilst the enquiries seem to follow a boiler plate template that is used for every enquiry, don’t just resend them your technical report. That being said, go back to your technical report and seek to answer the questions using the information that you have already included in the report to answer the specific questions being raised. it will show a consistency in your answers.
If they ask for more information than had been provided in the technical report, then provide that information. Expect it to go through 2 or 3 phases at the very least and be prepared for an alternative case worker to pick up the enquiry at some point.
If you would like to have a conversation about an enquiry or your R&D claim before you submit it, you can book some time to discuss your R&D projects with me by booking a free, no obligation discovery session at https://calendly.com/cooden/discovery-gbj. Good luck!