HMRC have recently introduced measures to combat fraud within R&D, including lowering the SME tax relief and increasing compliance requirements, as Ant Lalsing details in his article here. With increased HMRC scrutiny, it’s more likely you may receive correspondence from HMRC regarding your company’s R&D claim.
Why might HMRC check my R&D claim?
HMRC might decide to check your R&D claim for several reasons, but common underlying factors include:
- Information has been entered incorrectly in the CT600 company tax return;
- The claim has missing information such as a missing Additional Information Form;
- The company’s trade might not usually be associated with research and development activities;
- The claim is accompanied by insufficient narrative, particularly detailed explanation of how qualifying projects are innovative;
- The claim was submitted by an R&D specialist firm known to HMRC as a firm who promotes aggressive or fraudulent R&D claims.
What can HMRC do?
HMRC have several options if they suspect an R&D claim might be fraudulent:
- HMRC may send a ‘one to many’ letter, commonly referred to as a ‘nudge letter’. This might be if HMRC are targeting a group of companies at once. For example, a nudge letter campaign in August 2023 targeted nursing and care homes submitting R&D claims, as the industry is not one usually associated with R&D. The purpose of nudge letter campaigns is to prompt a review of the validity of the R&D claim and these letters encourage you to make any corrections voluntarily.
- HMRC can use their powers to ‘correct’ your company’s CT600 tax return. If this happens, HMRC might simply remove the R&D claim from the tax return. If you disagree, you are required to submit an amended CT600.
- HMRC can open a formal enquiry or compliance check into your tax return which will focus on the R&D claim, but HMRC may then start investigating other aspects of the company’s tax affairs.
- Instead of or in addition to opening an enquiry, HMRC may send what’s called a Schedule 36 notice, which is a request for further information and documents. Occasionally HMRC’s request can be excessive and it’s important to remember that they should only request information and documents that are ‘reasonably required’ to check the company’s tax position.
- Where HMRC are out of time to open an enquiry, they can make discovery assessments. The time limits to do so depend on the behaviour that has caused the loss of tax. At the moment, HMRC are more likely to request further information or open an enquiry, however in future if HMRC believe they have missed a fraudulent claim they may rely more on discovery assessments.
What should I do if HMRC enquire into my R&D claim?
While HMRC investigate an R&D claim, they will refuse any pay-outs of R&D tax credit claims if you have claimed a cash credit, or in cases where R&D reduces the overall corporation tax liability HMRC will expect the CT liability to be due without the R&D relief deducted. It will therefore be necessary to engage with HMRC in order to receive the relief you believe to be due.
These are a few things you should bear in mind if you receive correspondence from HMRC regarding your R&D claim:
- Read and digest the letter and understand what HMRC are asking of you or what action they are proposing.
- Check for any deadline within the letter to respond. Where you can and with help from your adviser, reply by the deadline, or contact HMRC using details on the letter to request further time if needed.
- Consult your adviser to ensure that any enquiry opened by HMRC or any request for further information is within the scope of HMRC’s powers, i.e. that any enquiry is opened within the appropriate timeframe, and that any request for documents is ‘reasonably required’. If you believe HMRC’s request for information is excessive, you must articulate why certain documents are not relevant.
- If you are appealing against an HMRC decision, be sure to make it clear you disagree, and what grounds you have for appealing.
- If you realise you have made a mistake, all is not lost. You may be able to amend your tax return if you are in time to do so, or in the case of historic errors you can make a voluntary disclosure to correct your position.
In all cases we recommend that you consult a trusted adviser to support in corresponding with HMRC, and importantly, do not ignore any correspondence from HMRC in the hope it will go away as this will likely make matters worse in the long run.
Our approach at Menzies is to review the merits of HMRC’s challenge and correct any misunderstandings on HMRC’s part to help achieve an early resolution, while ensuring you know your rights as a taxpayer and are complying only with reasonable and proportionate requests from HMRC.
For support with any HMRC checks into your R&D claim, contact our Tax Disputes and Disclosures Team or contact us below: