An HMRC enquiry is simply the process by which HMRC ask questions or seek clarification on certain aspects of an R&D tax relief claim. It can be triggered by something in the claim itself, or may be part of wider reviews or spot-checks that HMRC carry out to assess their own processes.
Can you avoid enquiries?
Short answer: no.
Long answer: Still no. HMRC reviews every tax return and R&D tax claim to some extent, and will always choose a certain proportion for more in-depth reviews. They also enquire into R&D tax claims as part of a wider review of a company’s tax affairs, so there’s no fool-proof way of completely avoiding enquiries. Having said that, you can do a lot to keep the risk of enquiry at the baseline level. Badly put-together claims are always at a higher risk of being enquired into, especially if they contain certain triggers.
What can trigger an enquiry?
Over our years of working in the world of R&D tax, we noticed there were a handful of things that hugely increase the risk of an enquiry:
- Changes in claim size: Companies with a history of making claims of a certain size can find themselves facing an enquiry if the claim suddenly jumps in size. It can suggest to HMRC that the claim has been overstated, especially if there hasn’t been a similar increase in turnover or staff numbers.
- Disproportionate claim size: Claims where the eligible expenditure is a large proportion of the turnover can look a bit wonky to HMRC. This is particularly true for manufacturing and food production companies, where HMRC would expect the vast majority of staff time and resources to be devoted to business as usual.
- Claims from unexpected sectors: Claims made by companies that operate in sectors that would not traditionally be associated with R&D can raise eyebrows. This is especially acute for non-tech companies that have carried out software related projects.
- Lack of alignment with accounts: It’s really important that the costs included in an R&D claim align with the published accounts for the claim period. If, for example, grants are listed in the accounts but this is not reflected in the R&D claim, this can trigger questions about whether the grants were used for R&D.
- Doesn’t look like R&D: If HMRC read the technical narrative and can’t understand what R&D was undertaken or how it fits with the requirements of the scheme, they’ll have a lot of questions!
How do I reduce the risk?
The good news is that it’s usually easy to avoid these triggers, or mitigate the risks they introduce. First and foremost having consistent, reliable processes for pulling together R&D claims is key. This makes sure that nothing is missed and there’s a good audit trail of why certain projects and costs were included.
Once you’ve got the process worked out, it’s vital that it is well documented by the technical narrative. Ensuring that all of HMRC’s questions are answered without including any irrelevant information is key. For more information on how to write a good technical narrative read this article.
Finally, there will always be eligible claims that contain triggers that can’t be removed, so it’s important to mitigate them as much as possible. For example, if a company’s claim has quadrupled from one year to the next, include a sentence or two in the technical narrative explaining this increase. It’s good to acknowledge to HMRC that a claim might look unusual and answer any specific questions they might ask about this before they ask them.
How worried should I be about enquiries?
HMRC don’t publish statistics about enquiry rates for R&D tax claims, but we know from our own data and that of other providers that 0.5-2% of claims are enquired into. Even then, as long as you’re confident that the claims that you submit are robust and compliant, an enquiry is no reason to panic. In fact, we find that they can be a great opportunity to have a conversation with HMRC about their current interpretation of the guidance and how they like to see claims presented.
How does the WhisperClaims app help?
If you are currently using the WhisperClaims app, or thinking about it, here’s a quick recap of the features that will steer you in the right direction when it comes to preparing robust, HMRC-friendly claims through our platform.
- A robust question-set: our questions poke into each corner of the legislation meaning you won’t forget to include important information in your client’s claim.
- Consistent, reliable process: the app offers you a very structured and repeatable claims preparation process.
- Clear indicators of eligibility: you’re faced with end points during the claims preparation process if your client’s project details do not meet the eligible criteria.
- Objective decision making: the app provides you with an objective decision making tool, rather than relying on your subjectivity on whether a client may or may not be eligible.
- Screen out borderline cases: you can use the tool to screen for borderline cases and avoid wasting time pursuing claims that may not be eligible.
Looking to create an HMRC-friendly R&D claims preparation processes?
Our ebook is loaded with helpful tips on how to streamline your claims processes and offers expert guidance on the R&D tax relief scheme. Download your copy.