Why are HMRC enquiries surging?
Over recent months HMRC enquiries into R&D Tax Credit claims have surged but what has prompted the spike and what does it mean for businesses making R&D claims?
There is a major discrepancy between the R&D spend reported in the government’s annual BERD survey (which is used to measure the UK’s total investment in R&D) and the expenditure on which HMRC has given R&D tax relief. HMRC’s figure is considerably higher, which implies false claims are being made and credit is being awarded for work that isn’t R&D according to the BERD survey.
There have also been a number of high profile cases in which companies have fraudulently claimed millions from the R&D scheme. One fraudster used his business to claim £29.5m in tax relief against a purported £137m spent “on developing an IT healthcare system for two countries in the Middle East”, while another case saw six men arrested following an investigation into a multimillion-pound R&D tax relief fraud scheme. These are just two examples that have hit the headlines recently.
In an attempt to crack down on fraudulent claims and ward companies off from making future attempts to claim money from the R&D scheme on false pretences, HMRC has become more stringent when processing claims resulting in an increased number of enquiries.
What is an HMRC enquiry?
A HMRC enquiry is an investigation into your R&D Tax Credit claim.
Before an official enquiry is launched, you will normally receive a ‘nudge letter’ from HMRC requesting more information on your claim. If the information provided isn’t to an acceptable standard for HMRC, an enquiry will be opened.
The purpose of an enquiry is to judge the legitimacy and accuracy of your tax credit claim.
The investigation will attempt to clarify your eligibility for R&D Tax Credits and determine whether or not you’ve claimed too much government funding.
How does the rise in HMRC enquiries affect me?
An enquiry may sound simple, but dealing with one can create major challenges for your business.
An enquiry into your claim could last several weeks. Even if your claim is 100% accurate, the investigation may delay your cash credit or tax relief by up to six months. For growing businesses, this is an extremely long time to wait, particularly at a time when the UK economy is trying to recover post-COVID-19.
An enquiry could also damage your relationship with HMRC, reduce your funding windfall, as well as embroiling your technical and financial teams in lengthy back and forths with tax inspectors.
If your R&D Tax Credits claim has already been submitted, was relatively large, technically complex, or compiled by someone unfamiliar with the scheme, you are now much more likely to face a difficult encounter with HMRC.
The increase of HMRC nudge letters and enquiries isn’t good news but don’t worry, there are a few steps you can take to minimise the risk of an enquiry if you haven’t filed yet:
1. Check and check again
Ensure every expenditure you have claimed complies with the scheme.
2. Include a technical narrative
A technical narrative is a document (between two to five pages) explaining your development work clearly for HMRC’s tax inspectors to understand.Including a technical narrative strengthens your claim by demonstrating that you meet HMRC’s definition of ‘R&D’. It also helps to validate your claim size by showing the tax inspectors the scale of your development work.
3. Work with a specialist R&D Tax Credits advisor
Undoubtedly, the best way to avoid an HMRC enquiry is to work with an R&D Tax Credits specialist like EmpowerRD, who will build a robust claim that will withstand any HMRC scrutiny. A responsible provider will also assist your enquiry at no extra cost. At EmpowerRD we will always defend you in an enquiry at no extra charge.
Working with EmpowerRD
We take great pride in our successful claim record. Fewer than 0.4% of our claims have resulted in an enquiry, and in none of those cases was the enquiry due to a problem with our R&D tax credit claim. In addition, none of our claims has been reduced or received a penalty.
As one of four trusted advisors sitting on HMRC’s R&D Consultative Committee, we have unique insight into the current and forthcoming changes to the scheme.
Get in touch today to discuss your claim with our experts.