ThirdRock Hot 10 Tips to avoid a HMRC Enquiry

It is widely acknowledged that R&D Tax Credit claims have historically received a ‘light touch’ by HMRC. This approach has inevitably led to HMRC facing a growing challenge presented by a large increase in the number of claimants that are often error strewn and, in some cases, fraudulent. This changing landscape has meant that HMRC devoting greater resources applied to scrutinise claims to protect the public purse.

 For genuine claimants there is nothing to fear but, a HMRC Enquiry which can take six months or more to be resolved is to be avoided, if possible. Mistakes by unwary claimants will result in a reduction of the tax benefit and will be punished with a tax penalty.

ThirdRock has identified key areas where often costly mistakes in compiling a claim can be avoided by adopting an insightful, skilled and professional approach.

 1.     Use a reputable and tax qualified advisor to handle your R&D tax claim

 HMRC inspectors are only human and merely having the name of a reputable and qualified advisor highlighted in the claim methodology will indicate to HMRC that the claim has been prepared with a degree of knowledge and skill. Greater scrutiny will naturally be given to self-prepared claims or, claims submitted by non-specialist accountancy practices or via semi-automated and boilerplate service providers.

 2.     Provide HMRC with a robust technical narrative

 Just providing numbers on the company’s Corporation Tax Return won’t cut it. The requirement to submit a detailed technical description of the company’s R&D projects which, will shortly become mandatory, should be obvious however, many claimants either ignore this or provide vague summaries of the projects undertaken. Robust narrative identifying the project aims, technological advances benchmarked against sector standards (as identified by a competent professional in the field), uncertainties faced and actions to overcome those uncertainties, should all be explained in the narrative detail. 

3.     Your R&D tax claim is not a marketing document

No matter how great you think your company is, HMRC is only interested in the technical advances you are claiming set against your sector standards, the challenges faced, the technical uncertainty and how you resolved those uncertainties.

 4.     Time Periods – R&D activities and accounting periods overlapping

 t is important to keep in mind that R&D enhanced tax relief relates to project costs applicable from when the project technological uncertainties are identified to the point that those uncertainties are resolved.  It is therefore important to identify project qualifying dates and how these may transcend accounting periods. It is important to make clear and make defined statements. It is not advisable to state, for example “the company continues to seek the same technological advances as last year.”

 5.     Claim methodology

 Guidelines on the meaning of Research and Development for tax purposes are set out by the Department for Business, Innovation & Skills (BEIS) in a document (last updated December 2010). It is important the claimant company always references the BEIS and HMRC guidelines. HMRC is also looking for details of the Competent Professionals who have made the judgement of what activities qualify as R&D and the claim should name and describe these professionals detailing qualifications and experience.

 6.     Importance of named Competent Professional(s)

 Competent Professionals in the relevant field of science or technology play a crucial role in determining qualification for R&D enhanced tax relief yet many claims pay lip service to this essential component of a successful R&D Tax Credit Claim. HMRC is looking for claimants to detail who their Competent Professionals are and to explain their scientific / technological credentials in the relevant field. By including a section in the claim report on Competent Professionals, HMRC will feel more confident about the advances claimed and uncertainties overcome thereby reducing the likelihood of a HMRC Enquiry.

 7.     R&D staff do admin and make tea!

 Many R&D tax claims claim 100% of individual staff costs applying to the R&D activities. Whilst in theory there is nothing wrong with this, it is a red flag to most HMRC inspectors who rightly maintain that all employees will inevitably have some working time that is not attributable to R&D. This is particularly relevant to company directors who have additional company statutory responsibilities which are outside R&D.

 8.     Staff roles explained and R&D activities

 HMRC will expect to see which personnel are involved with the R&D projects and what their respective role is during the period of project technological uncertainty. The R&D claim should detail the staff involved and specify their role(s). For example, there may be a valid reason why a ‘marketing manager’ or ‘product manager’ participates in R&D but it will be a red flag to HMRC without an explanation of the relevant activity undertaken.

 9.     State Subsidy and Subcontracting

 Both subcontracting and subsidy have become hot topics by HMRC when scrutinising R&D tax claims and it is important that all claims align with the legislation. This is particularly the case in the area of SME subcontracting where HMRC are often seeking to understand contracts between the claimant and other entity and where the R&D risk lies. This will impact on whether a claim is valid either under the SME or RDEC scheme and should be clearly articulated within the claimant report if HMRC scrutiny is to be avoided.

 10.   Multiple year claims in single report

 It is common practice for practitioners to combine two separate years R&D claims into a single narrative. There are dangers with this approach as the R&D project report dates may conflict with the accounting period dates and R&D costs analysis across project/periods may fluctuate and differ. Care should be taken and separate period reports are preferred for clarity and to avoid HMRC scrutiny.

Chris Williams ATT (Fellow)

Note to editors: Chris Williams is a fellow of the Association of Taxation Technicians. Chris has over 30 years tax experience both in professional practice and industry. Chris has run and exited numerous business enterprises during his business career.