The Chartered Institute of Taxation’s view on the HMRC’s handling of R&D

Jan 8, 2024

THE CHARTERED INSTITUTE OF TAXATION’S VIEW ON THE HMRC’S HANDLING OF R&D

R&D tax relief has been in the headlines over the last couple of years, but not in a positive way. Tales of inappropriate claims from some unscrupulous players, coupled with poor oversight have shone a spotlight on the industry and forced HMRC into action.

Contrary to industry advice and conclusions from several committee hearings in the House of Lords, HMRC’s approach to these issues, over the past 15 months, has taken the form of “volume compliance”.

Rather than fully trained teams of caseworkers taking a measured and open-minded approach to the majority of R&D claims, volume compliance has seen similar letters sent to thousands of claimants. In several cases identified by the Chartered Institute of Taxation (CIOT), they show a lack of adherence to HMRC’s charter, a negative view of the R&D from the outset and confusion with the specific technologies/scientific areas that are being claimed for.

After growing industry complaints and very little improvement, the CIOT wrote to the HMRC in December to give industries perspective on the scheme including positive steps that had been taken, but mainly discussed the ongoing issues.

Below are some of the key points they raised, which as yet have not had a reply:

  • We welcome HMRC’s acknowledgement that their handling of some R&D claims has not met their own standards and commitments under the Charter.

 

  • …legitimate claims are still being rejected, and the underlying policy objectives of R&D tax relief…continue to be undermined as businesses are put off claiming relief to which they are entitled.

 

  • …the volume compliance approach does not work well for R&D tax relief claims…the use of undertrained caseworkers; and the complex nature of the relief, requires technical consideration to ascertain whether or not there has been qualifying R&D. The examples we have seen demonstrate a strong caseworker bias towards rejecting claims and disregarding the testimony of competent professionals.

 

  • …the system continues to fail to deliver a fair enquiry process for a significant number of genuine claims…ongoing refusals to have conversations make it very difficult for genuine claimants to defend their claim.

 

  • In our view, the balance between tackling the problems of error and fraud and the impact on compliant claimants is currently tilted too far towards the former. Genuine claimants and compliant taxpayers should not suffer because of the bad behaviour of others.

 

  • A better approach would be for HMRC to reduce the volume compliance approach until caseworkers are properly trained, with an appropriate understanding of R&D. Caseworkers need training and confidence to more frequently recognise that some cases are poorly selected… and warrant a more specialist and detailed enquiry. These cases would preferably then have a single named person dealing with them…and who is contactable…

 

  • HMRC are using paragraph 16…to correct corporation tax returns by removing the claim for R&D tax relief… challenging R&D claims in this way does not accord with HMRC’s guidance…(and) amounts to an abuse of power.

 

  • …we are still receiving reports of poor and incorrect communications from HMRC… SMEs (are) giving up on R&D claims…because the stress and hassle of dealing with an enquiry is not worth it…closure notices that HMRC thinks have been issued are not always received.

 

  • Caseworkers often state in letters to agents that there is no requirement for them to be ‘subject matter experts’ in relation to R&D. In our opinion, in most cases some expertise is required in relation to R&D to enquire properly and effectively into a claim for R&D.

 

  • The Charter says that ‘we’ll make sure that the people you deal with have the right level of expertise’. We do not think that HMRC are currently meeting this commitment. We are seeing cases where caseworkers do not engage with the information given… our members’ experience is that there is little or no enquiry into the facts of the R&D presented… caseworkers respond with statements as to why they consider there is no R&D, often incorrectly citing the Guidelines. There is no discussion around (the) quantum of the claim or which scheme has been used, because the claim is rejected in full.

 

  • We have discussed R&D with several firms and all report on different outcomes experienced in relation to cases selected for enquiry by the ISBC (non-specialist) teams compared to the WMBC (specialist) teams. In nearly all cases the enquiries by WMBC result in an R&D tax relief claim being agreed, albeit in some cases with…changes.

 

  • In contrast, the vast majority of the enquiries by ISBC teams result in a rejection of the whole claim. This is surprising since it is the same experienced…firms that are submitting the R&D. It is not clear to the firms we have spoken to why the cases that have gone to ISBC and have been refused, are inherently less genuine claims than those which have been accepted by WMBC.

 

  • R&D is technical, it is often difficult to ‘dumb down’ the language and put it in ‘layman’s terms’…meetings were generally considered to be the most effective way to review the projects, discuss and agree the nature of the projects claimed, or identify any areas of disagreement. There continue to be mixed messages around whether and when it is possible to speak to HMRC…substantive meetings/ conversations are still generally not possible.

 

To surmise, making an R&D claim is now more complicated, and requires more information and proof to satisfy the HMRC than ever before. Nonetheless, valid R&D is still claimable and compensates the client sufficiently for the extra effort taken. Our expert team can help decide whether a claim is valid and will support it appropriately.

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