HMRC Issues R&D Tax Update to CIOT Regarding Compliance Activity
At the end of November, HMRC issued an update to the Chartered Institute of Taxation (CIOT) about recent compliance activities concerning R&D tax relief claims. As many readers will be aware, HMRC’s approach to R&D tax relief claims has changed markedly over the past year. The ‘volume approach’ to enquiries has been controversial, with many claimant companies being embroiled in lengthy and frustrating compliance checks.
The update provided more recent insight into the use of the new Additional Information Forms (AIF) which are now required to be submitted for all claims (as from 8th August 2023). Back in September, YesTax reported that nearly half of claims were being filed without an AIF being submitted. The failure to submit an AIF leads to an automatic rejection of the R&D claim. HMRC say that they are now seeing a failure rate of around 15% (from the initial 45%), which HMRC say ‘is a great improvement, though suggests there’s still more for us to do’.
The update also provided some comment on HMRC’s controversial use of paragraph 16 of schedule 18 to Finance Act 1998, to deny claims without any enquiry being opened. Paragraph 16 sets out:
16(1) An officer of Revenue and Customs may amend a company tax return so as to correct–
(a) obvious errors or omissions in the return (whether errors of principle, arithmetical mistakes or otherwise), and
(b) anything else in the return that the officer has reason to believe is incorrect in the light of information available to the officer.
The use of Paragraph 16 is controversial as it rejects the claim without HMRC opening an enquiry. Many advisers have commented that the use of Paragraph 16 is unfair where R&D tax claims are concerned. Determining if a claim is valid can be a complicated task and requires a careful consideration of the relevant facts. Using legislation which concerns ‘obvious errors or omissions’ has sparked controversy. HMRC has stated:
We are correcting returns to remove Research and Development (R&D) tax relief claims where there is reason to believe they are incorrect, based on the information available to us. In these circumstances HMRC issues letters to help customers understand the reasons why we believe an R&D tax relief claim is not valid. This is aimed at claims where we’ve received information about the claim, but we believe it to clearly not be a valid claim (where there is any uncertainty an enquiry will remain the best option).
Continuing on a similar theme, HMRC also provided an update on the use of two new letters which are being issued to some claimant companies. The letters are being sent by the R&D Anti Abuse Unit (AAU) to companies which have made claims and which ‘have a high risk of being invalid’. HMRC’s stated:
The first letter will be issued where we suspect no advance in science or technology has been sought by the business, but where they may be advancing their own state of knowledge only.
The second letter will be issued in similar circumstances to the above but where the company is in a specific business sector where we wouldn’t normally expect R&D for tax purposes to have taken place, for example, hairdressers, beauticians, and personal trainers. Whether a company is in a specific business or trade sector is not the only consideration. This information is used in conjunction with other methods of identifying the correct customer base, so that we can reach as many companies as possible who may be approached by less than scrupulous R&D sales agents.
It is very apparent that HMRC’s bullish approach to non-compliance in the R&D tax sector will continue. If you, or your client, is embroiled in a lengthy compliance check, we’d welcome a conversation to see if we can assist.
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