R&D tax enquiries – helping to correct mistakes in claims

The UK government encourages firms who undertake research and development work to claim any R&D reliefs to which they are entitled. However, HMRC is tasked with ensuring claims are correct and claims which appear excessive are investigated.

HMRC undertakes this work in several ways:

• Checking some claims before making payment to the claimant companies
• Reviewing amended claims or Corporation Tax returns to understand why the initial claim was ‘incorrect’
• Opening enquiries into claims, to challenge the amount claimed or whether the activities qualified for R&D at all
• Writing to companies suggesting that the claims may not be correct, via it’s Fraud Investigations Team
• Undertaking criminal investigations with a view to prosecution.

R&D Disputes: How to navigate the HMRC crackdown on claims

One in five R&D claims are now under enquiry - it has never been more important to take preventative measures to ensure your claims are compliant and know how to prepare for, and manage, a claim that is being challenged.

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5 reasons to get expert support with R&D claim corrections

1. Supporting voluntary disclosures

If you realise mistakes were made in R&D claims for earlier years, then you will get peace of mind by telling HMRC about it before they ask questions about the company’s tax position. Sometimes mistakes come to light when companies change advisers or go through the due diligence checks in the run up to selling a business or subsidiary. A Tax Dispute Resolution (TDR) expert can advise on the most appropriate for you to make a ‘disclosure’ to HMRC (depending on your company’s specific situation) and guiding you through the disclosure process. Approaching HMRC voluntarily is also likely to reduce any penalties that HMRC will seek to charge.

2. The technicalities

We recognise that R&D rules are complicated – not only around what R&D is, but also what expenses can be legitimately considered in a claim for R&D tax relief. Our R&D team include industry experts who work closely with companies’ in-house professionals to make sure their claims are robust. Our TDR specialists are experienced at working collaboratively with the BDO’s R&D experts to understand where the errors are in your claims and what the correct claim should be before explaining that analysis to HMRC.

3. Time limits and behaviours - do you need to go back 20 years?

The UK tax legislation includes three main categories of behaviours: innocent, careless (similar to negligence) and deliberate behaviour (similar to fraud). These behaviours are linked to the three main time limitations to charge back taxes, either four, six or twenty years respectively. HMRC will focus on whether the taxpayer or the agent acting on their behalf carelessly or deliberately over-stated the R&D claim. Establishing which behaviour applies in your case and negotiating agreement with HMRC is a particularly complex area but applying the correct time limit is vital in limiting HMRC’s enquiry and it can also make a huge difference to amount of tax and late payment interest charged. We have extensive experience and skills in handling such negotiations.

4. Tax-geared penalties

In every case where a R&D claim is found to be excessive, HMRC will automatically consider whether penalties are due, regardless of whether HMRC opens the enquiry or a voluntary disclosure is made (even through filing an amended tax return or claim). Penalties can be up to 100% of the incorrect tax but how much is charged may turn on factors, for example:

• Whether the company gave its adviser the relevant information to use when preparing the claim
• The extent to which it correctly relied on professional advice
• Whether the directors checked the claim as best as they could before it was made.

We can help make representations where the facts support the case that the penalties should be lower. Cooperation and full disclosure with HMRC through a professional adviser will also help to reduce penalties.

5. Getting time to pay.

If R&D claims were excessive, HMRC will want the company to repay any reliefs to which it was not entitled. In the current economic environment with its inherent cashflow pressures, that could cause practical difficulties for the business. We can help request a formal settlement incorporating a time to pay agreement so that the amount payable to HMRC can be settled in instalments acceptable to both parties. This avoids assessments (tax bills) being issued leading to HMRC’s Debt Management team formally pursuing payment in full within 30 days or debt enforcement action.