R&D Tax Credits: HMRC Compliance Guide

R&D tax credits provide a fantastic way to fund innovation in your business. Recent changes at HMRC have seen compliance pushed to the top of the agenda with much more of an emphasis on tackling abuse of the R&D tax credits system. This shift has created hesitancy among many businesses that might otherwise have been using R&D tax credits. While this is understandable it’s simply not worth missing out on the opportunity to obtain this kind of cash flow support for your enterprise by not making a claim. So, here’s what you need to know about HMRC compliance.

Why is this guide necessary?

Because recent months have seen HMRC getting much stricter in terms of R&D tax credits claims, especially those that don’t comply with basic requirements. There has no doubt been abuse of the system and this has created problems for those who are genuinely eligible for R&D tax credits and could benefit significantly from them. HMRC has now invested in more fraud investigators to help weed out those that shouldn’t be receiving R&D tax credits – with a £510 million bump in investment from the government to help achieve this. In terms of what this means for anyone who wants to make a claim for R&D tax credits it should not put you off. It’s much more about focusing on ensuring that your claim is accurate and well put together – and also allowing some additional time for processing given the extra checks that are being put in place.

The HMRC enquiry/compliance check

Although this might sound like a pretty intimidating process it’s actually just HMRC checking that your claim meets the requirements for R&D tax credits. Call it an enquiry or call it a compliance check, all that is happening is that the information being submitted to back up your claim is being verified. That might look like requests for more information to make sure that the claim is a genuine one and that what you’ve submitted complies with the rules of R&D tax credits.

Is a compliance check inevitable?

No. When you make a claim, the paperwork will be examined to look at what you’re claiming for, how much you’re claiming for and to carry out any extra checks, such as comparing the amounts that you’re claiming for against industry benchmarks. If these don’t seem to match up then HMRC might require more information – it’s not about penalising you and your business but ensuring that the claim is genuine. There are a number of situations that are more likely to trigger a compliance check. These include:

  • If your claim value has increased significantly.
  • The R&D projects that you’re doing are either new for you or in your industry.
  • There is a lack of evidence to support your claim.
  • The financial data doesn’t make sense, for example it hasn’t been calculated correctly.
  • Claims that include subcontractors are often more likely to be compliance checked.
  • It may just be a random spot check.

How does the compliance check work?

You’ll be notified by letter from HMRC that a compliance check is going to take place. The letter will include a list of questions that you’ll need to supply answers to – and you should aim to do this within 30 days of receiving the letter. You may also be required to provide some supporting evidence along with your answers. That could be enough to close the enquiry into your claim. If it’s not then there may be further inquiries, which usually take the form of a face-to-face meeting where you’ll be asked questions about your claim and you’ll be able to respond.

What are the timeframes involved?

Most enquiries take a minimum of three months to conclude. However, it’s worth noting that some can take years – these are often the checks where poor information, or no information, has been supplied or where there has been a lack of cooperation. So, if you’re looking to expedite the process it’s a good idea to give HMRC what they want as quickly as possible.

What kind of outcomes can you expect from an enquiry?

  • A delay to your claim. If your claim is under an enquiry then any payout will be paused. Most payouts take around 40 days at the moment and with an enquiry that’s likely to be longer.
  • A successful defence. Especially if you’re working with an advisor, a successful defence is a likely outcome and this will mean that the HMRC enquiry has found no reason to stop the claim.
  • A reduction in the claim size. It may be that HMRC feels that the size of the claim made was too large. In that case, you’ll still receive R&D tax credits but in a lesser amount.
  • Investigation into previous claims. If HMRC suspects that there has been a deliberate fraud then it has the right to go back and check all the claims that you’ve made over the past six years. It’s worth bearing in mind that, unfortunately, once you’ve gone through an enquiry you may also have a flag against your business for future claims.
  • A full scale audit. Sometimes, you may find that HMRC decides to carry out a full audit as a result of an enquiry into R&D tax credits.
  • These only apply to fraudulent claims.

You can challenge the outcome of your enquiry if you’re not happy with the decision.

How to avoid an HMRC compliance check

Unfortunately, you can’t avoid it. The best way to ensure that your claim documents don’t trigger an enquiry is to work with a specialist advisor. However, random spot checks can still occur.

Any dealings with HMRC can feel intimidating, especially when it comes to something important like R&D tax credits. However, an enquiry or compliance check doesn’t need to mean the end of the line for your claim. Either way, working with an experienced advisor can help your business to successfully navigate whatever happens.

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