R&D Tax Relief Claims and the Burden of Proof – Are Genuine Claimants Being Discouraged?
A recent feature of R&D tax relief enquiries has been the requirement to provide HMRC with ‘proof’ or ‘evidence’ that an advancement in technology has been made. This was a theme which was explored in a recent First Tier Tribunal case – Grazer Learning Limited v HMRC – where the tribunal stressed that the burden of proof is on the claimant company to demonstrate an advancement has been made.
The requirement to provide proof of an advancement was also a feature in a recent enquiry case which was handled by YesTax. The response prepared by YesTax asked what form this ‘proof’ may take. The inspector dealing with the enquiry could not answer this point. Despite statements from the competent professional at the claimant company outlining where the advancement was as well as statements from the customer which had placed an order for the technology, the inspector was still unable to accept the evidence that an advancement had been made. The case was a worrying example and one which left us scratching our heads.
One thing we learned from this experience is that documentation is key to reducing the risk of an enquiry. Failure to keep written records means a reliance on oral evidence which may lead to a rejected claim.
Legitimate Claims Lost?
Many reputable advisers will have experienced the situation: you’ve informed a client they do not qualify for the relief, only to find the client has sought advice elsewhere and filed a claim which would fall over at the first hurdle, should it be subjected to any level of HMRC scrutiny. Where clients seek advice elsewhere, with the sole motivation of getting the answer they want, reputable advisers are placed under enormous pressure.
The problem here rests with the fact that a huge number of claims are processed by HMRC without any level of scrutiny. Poor quality claims can be filed and processed, allowing spurious advisers to claim ‘success’ and leave reputable firms who may have advised differently, appearing as the bad guys. However, in recent months, HMRC have significantly increased their enquiry resource and the number of enquiries being opened has risen dramatically. Whilst this may initially appear as a good thing, there are other considerations.
An increase in HMRC enquiry resource will certainly be weeding out bad advisers, but consideration must also be given to genuine claimants who are subject to enquiry as a result of increased HMRC resource.
The time and cost associated with an R&D claim enquiry is not insignificant, so it is a Pyrrhic victory if increased HMRC resource leads to a reduction in poor quality claims whilst also discouraging genuine claimants from the scheme with fears of a long-winded, costly enquiry. In recent months, we have seen evidence that the latter is starting to happen.
In the last year, HMRC have increased their SME claim processing time from 28 to 40 days – a move which is designed to give them more time to review claims. The previous policy of process now and review later seems to be changing. However, it’s doubtful that every claim can be reviewed before it is passed for processing, given that 80,000+ claims are being filed each year.
In the last two months, we have seen numerous legitimate claims being lost by taxpayers who were not able to supply documentary evidence. HMRC no longer have the resource to conduct meetings at client’s premises where they can “see it for themselves”, enabling them to circumvent the need for demanding levels of documentation.
All too often, legitimate R&D claimants are unable to dedicate the time and resource to defend an R&D enquiry due to the increased amount of time it takes to satisfy HMRC that the claim is valid. It is wrong that HMRC will potentially see these cases as being won due to ‘fraud’, ‘error’ or ‘abuse’ of the scheme rather than the clients’ inability to dedicate the time to pursuing the enquiry.
With all that has been outlined in this and our previous article, The New R&D Tax Relief Enquiry Landscape, where does this leave claimant companies and what is the best approach for future claims? Tomorrow we will be exploring exactly this and outlining the new draft guidance for claims made for accounting periods beginning on or after 1st April 2023.
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