Five Reasons an R&D Tax Claim May Trigger an Enquiry from HMRC
At YesTax, we have years of experience of not only preparing R&D claims for our clients, but also in assisting accountants across the UK with HMRC enquiries relating to claims they have made themselves. It’s fair to say we’ve seen a number of horror shows, where claims have been incorrectly made or guidance has been completely ignored. In our experience, there seems to be a false confidence amongst many accountants. Making a few claims that may have slipped past the eyes of HMRC doesn’t make anyone an expert – yet many accountants continue to give poor advice in this area of tax, passing themselves off as specialists.
This article outlines the five most common reasons HMRC may open an enquiry into an R&D claim.
Qualifying R&D activity has been misunderstood
Of the many R&D enquiries we’ve assisted with, a complete misunderstanding of what constitutes qualifying R&D is the most common line of enquiry. From the development of a new menu in a restaurant*, to a claim based on the purchase of some off-the-shelf software, many advisers (and clients) are confused about what activity actually qualifies for R&D tax relief. Where there has been a material misunderstanding of qualifying activity, clients run the risk of having the whole claim disallowed by HMRC. This can lead to significant corporation tax liabilities – a nasty surprise for any company.
*Not a lie!
Non-qualifying costs being included in the claim
Equipment hire. Travel costs. Server hire. Patent attorney fees. Dividends for the R&D Director. All fine to include in an R&D claim? Think again. We’ve handled many enquiries where advisers have included one or all of the above costs – and have subsequently been challenged by HMRC. Our knowledge bank outlines the qualifying costs for an R&D claim. If it’s not listed in there, it doesn’t qualify!
Incorrect declaration as an SME.
Nothing fills us with horror more than getting this part of the claim incorrect! Imagine the scenario. You’ve completed and filed the claim, and you’ve told your client there is a 50k repayment due under the SME rules. A few weeks later you receive a letter from HMRC, challenging the company’s status as an SME for R&D tax relief purposes. Suddenly, the client’s repayment has been reduced to a fraction of its former size, and there’s the potential that certain costs no longer qualify. It’s absolutely imperative claims are made under the correct scheme (SME or RDEC). On top of this, the rules regarding partner and linked enterprises can often complicate matters when deciding which scheme to claim under. You’ve been warned!
Disregard for ‘relevant costs’ where connected party costs are incurred
We’ve seen a number of cases over the years where accountants have claimed costs which have been incurred from a connected party. This often takes the form of another group company invoicing the claimant company for use of its staff. Where this is the case, it’s common for the ‘relevant costs’ rules to be overlooked. These rules are designed to ensure connected party costs are not artificially inflated, to increase the size of the R&D claim. It can get a little tricky determining what the relevant costs are in a connected party transaction. Are you aware of them?
The calculation of the tax credit has been made incorrectly
Having specialised in R&D tax relief for over ten years, and having worked with dozens of accountants across the country, we’ve experienced a huge range of accounting software and how it deals with R&D tax credit calculations. To say that many software systems get it wrong would be an understatement! We recommend a manual calculation alongside the software’s calculation to confirm the figures are correct. We won’t name the offending software systems, but they probably know who they are after our calls of complaint!