The New R&D Tax Relief Enquiry Landscape

Thursday, 19th January, 2023

The seismic changes in the R&D tax relief sector are the result of The Treasury finally acknowledging that a serious problem has existed for several years. Whilst many reputable advisers in the market have been sounding the alarm for some time, HMRC and The Treasury had previously been reluctant to formally acknowledge the problem. However, this has now changed and there has been a major change in HMRC’s approach to R&D tax relief claims.

From April 2023, new rules are being introduced to combat fraud, error and abuse of the R&D tax system. These include a new statutory requirement to provide details of projects and expenditure, the requirement to notify HMRC which adviser has been used during the claims process and a requirement for some companies to pre-notify HMRC of their intention to make a claim.

In addition, HMRC has recruited additional technical resource which has resulted in a dramatic rise in the number of enquiries opened into claims. Enquiries are now longer and more involved, with the requirement to provide substantiating evidence far greater than ever before. HMRC are increasingly likely to open enquiries into claims that have, in the past, been processed with no additional checks being performed.

As seen in recent tribunal cases such as Hadee Engineering Ltd and AHK Recruitment Ltd, the burden of proof falls squarely on the claimant company and so providing evidential proof and documentation of an R&D project has become expected.

In the days of yesteryear, enquiries were often conducted with on-site visits to claimant company premises which negated the requirement for protracted correspondence. Enquiries were concluded quickly and pragmatically.

 

Enquiries Today  

Today we see many enquiries as part of our enquiry resolution service. In recent months, the enquiries we have seen have always started with the same standard letter which is split into two areas:

1. R&D Activities

• Detail of the number of Research & Development projects claimed for within the period.
• An explanation of what the scientific or technological advance(s) is.
• An explanation of what the scientific or technological uncertainties involved in the project were.
• Detail of how and when the uncertainties were overcome.
• Detail as to why the knowledge being sought was not readily deducible by a competent professional.

 

2. R&D Costs and Calculations

• A breakdown and analysis of the qualifying expenditure using the sub-headings:

1. 1. Staffing Costs (name, job title, wage bill, value, details of the qualifying activities giving a brief description of their role in the R&D project(s).
   2. Software or consumable items
   3. Qualifying expenditure on externally provided workers
   4. Sub-contractor payments (name, brief description of their role)
   5. Relevant payments to subjects of a clinical trial
   6. Any other costs included in the claim to relief

• For any apportioned costs, the rationale and methodology used to come to this apportionment, with supporting evidence where available.
• Confirmation that all the amounts included above have been paid and incurred.
• Any other information which may aid the enquiry.

 

The letters usually include no reference to any information which may have already been provided to HMRC. In the cases where we’ve had enquiries opened, we’ve always prepared a full technical report and a full cost breakdown. However, the opening letter makes no reference to this, so very often the first response is referring HMRC to these documents which were submitted when the claim was filed.

What then follows is normally a more detailed interrogation of the claim, often asking some of the same questions again. In the examples we have seen, HMRC have subsequently requested one or more of the following:

• Meeting minutes or emails which provide evidence of the work being undertaken
• Evidence of payment for the costs included in the claim. Many are unaware that there is a payment requirement for R&D expenditure.
• Copies of grant applications for any projects in receipt of grant funding
• Details of transactions with related or connected parties
• Copies of contracts for projects where a customer has placed an order
• Copies of sales and purchase invoices
• Details of any patents filed in relation to the technology, and if no patent has been filed, reasons why this has not been considered.  
• A clear identification of all the technological uncertainties including:

• • The current technological limitations
  • Current practice and why it falls to resolve the uncertainty
  • What was the gap in technological knowledge or capacity which necessitated the commencement of R&D
  • An explanation of the research undertaken to establish these were uncertainties in the overall field of technology that could not be solved by readily deducible methods within a company’s knowledge by information in the public domain
  • All stages from planning to deployment

 

Whilst this all seems pretty reasonable, one concerning aspect of HMRC’s recent approach to enquiries is where HMRC request ‘proof’ or ‘evidence’ that an advancement in technology has been made. This is clearly an important issue, and one which we look at closely in a later article.

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