It is clear that HMRC takes a two-tier approach to dealing with R&D enquiries. On the one hand, there is the HMRC fraud investigation team and the campaign and projects teams which has a ‘shoot first and ask questions later’ approach by rejecting claims at the outset. 

On the other hand, there is (what we consider to be) the correct approach of an opened enquiry due to risk-assessed concerns over the validity of the claims followed by a request for further and better particulars. 

This article focuses on why the latter approach should be the one taken by HMRC in all cases, taking the example of a company where the Croner-i VIP Tax Team resolved a recent HMRC check.

In this instance, we were approached by a client to assist with a new R&D compliance check that HMRC had commenced following their recent claim for R&D tax credit relief.

The compliance check was being undertaken by HMRC’s wealthy and mid-sized business compliance (WMBC) R&D team, not the campaign and projects R&D team which was responsible for mass rejections in nearly all compliance checks they undertook since their inception in 2022.

The WMBC team generally undertakes a more thorough and detailed review.

The first step was to conduct a review of the company’s R&D claim and enquiry correspondence, familiarising ourselves with the three projects undertaken during the period.

It was clear from the tone of HMRC’s enquiry notice that they had strong reservations in respect the eligibility of the three projects within the claim.

We arranged meetings with the directors of the claimant company.  The directors were also the competent professionals for the purpose of two of the projects within the claim.

The focus of the first meeting was a discussion about the Department of Science, Innovation and Technology (DSIT) guidelines defining R&D for tax purposes and the company’s application for three projects within the claim. 

During the meeting, we agreed that one of the projects likely did not meet the conditions within the DSIT guidelines and it was decided that in the response to HMRC, we would remove this project and the associated expenditure from the claim.

Following the meeting, the client drafted a narrative to address the questions asked by HMRC in respect of project eligibility. We reviewed the narrative, providing feedback to the client on further points that would support the eligibility of the two remaining projects. We also advised on the language and writing style to use, with HMRC seemingly having issues with specific words and phrases.

HMRC replied a few weeks later with more questions as it wanted to assess whether the company was liable for a penalty for filing an inaccurate claim for the withdrawn project.

Subsequently, we responded with detailed arguments about how the inaccuracy arose and how, despite this, the company had taken reasonable care and should not be liable for a penalty under Sch24 Finance Act 2007 (FA 2007).

The next response from HMRC was a positive news for the client company as HMRC formally closed the compliance check and accepted that they had taken reasonable care so were not liable for a penalty.

The client company retained £126,000 of the £140,000 R&D tax credit relief that had been claimed for.  The client was, of course, delighted with the outcome.

Need help with your complex tax enquiries? Book a surgery slot with our tax experts on the Croner-i My VIP Tax Team