HMRC taxman approaching a tax claimant, holding a gavel and pounds stirling.

A brief guide to HMRC enquiries

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Few people relish a conversation with “the tax man”. Research and Development tax relief enquiries from HMRC are inconvenient at best, and at worst they can lead to a long drawn-out and costly process. However, in reality they are usually nothing to worry about. Here’s our brief guide to HMRC enquiries and how to navigate them unscathed!

Why is HMRC asking questions about my client’s claim?

Enquiries should not be viewed as a witch-hunt! There are a number of reasons why HMRC might raise an enquiry:

  1. They may want to understand more about the technical challenges of the claim.
  2. They may want to query the financial costs included in the claim.
  3. Sometimes it’s just a random sample, and your number comes up!

There are certain things that, in our experience, make it more likely that HMRC will enquire into a claim. These can range from making a large claim for a company operating in a less technical sector, to large jumps in claim size from year to year. 

What happens in an enquiry?

In the short-term, an enquiry means that payment of the R&D tax credit and/or tax repayment could be delayed.  This will give the inspector time to ask questions to better understand the R&D and how the costs claimed have been arrived at. These questions will initially be asked by letter or email. But the inspector may want to meet the competent professionals who have assisted in the claim’s preparation, just so that they can be reassured that the claim is technically eligible. 

In general, the process seems to be:

  1. HMRC write to you and your client stating that they may have questions about the claim – usually within a month or so of the claim being submitted
  2. HMRC write to you and your client again, this time with a list of questions about the claim, giving you a time limit to respond. 
  3. You respond to HMRC in writing.
  4. HMRC respond again, either to ask further questions or, more commonly, to request a meeting with the claimant.
  5. You have the meeting with HMRC
  6. HMRC write again with final points to be clarified
  7. You come to an agreement with HMRC about which projects and costs are eligible and resubmit the documents on that basis.
  8. HMRC accepted the amended claim, and pay-outs are adjusted to reflect the changes. 

What’s the best way to handle an enquiry?

The key thing is not to panic! Our best advice is to have good records, be honest, accurate, consistent and respond in a timely manner. Always engage with HMRC in a friendly, professional tone, and never, ever ignore communications from them!

When talking about innovation, it can sometimes be difficult not to bamboozle HMRC with “tech speak”.  But it’s important to remember, that if your client found it difficult to overcome uncertainties, in the same vein HMRC may find your explanation confusing.  Keep it simple and remember not all revenue inspectors are from a scientific background.  On the financial side, always sense-check if the costs seem realistic.  For example, staff will rarely spend 100% of their day resolving uncertainties.

What’s the most common outcome of an enquiry?

In almost all cases, HMRC will come to an agreement with you and your client about the eligibility of the claim, and the allowable costs. If things do not go as you would have hoped, you could be looking at a reduction of your claim value, but this is in general the worst outcome you could expect. 

Penalties are rare and tend only to be imposed in extreme cases where claims have been deemed to be fraudulent. However, we’ve also seen penalties being imposed on companies who refuse to respond to HMRC, so keeping the lines of communication open is very important. If HMRC refuse to accept the claim is eligible, you may be forced to withdraw the claim and repay any monies received. Penalties in this case might be imposed, depending again on whether HMRC feels the claim was fraudulent as opposed to misguided.

The worst-case scenario is where an agreement cannot be reached and the case ends up in an HMRC tribunal. These cases are expensive, drawn out and difficult to defend, so we’d advise avoiding this at all costs!

How to write an R&D tax relief technical narrative

With HMRC’s new mandatory requirement for project descriptions on all submissions, we wanted to share our experiences to help others to write their best possible technical narratives.

Available to download here.

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