R&D Tax Claims - Understanding HMRC and Careless Penalties
When it comes to submitting claims for R&D tax relief, accuracy matters. HM Revenue & Customs (HMRC) has the power to impose financial penalties when R&D claims contain inaccuracies that lead to an underpayment of tax. Among the most commonly encountered penalties we see being levied by HMRC are those for careless errors: mistakes made through a failure to take reasonable care.
Whilst careless penalties are less severe than those for deliberate or fraudulent conduct, they can still carry significant financial consequences. Up to 30% of the potential lost revenue can be charged under the careless penalty regime. However, not all mistakes automatically warrant a penalty, and in many cases, taxpayers have valid grounds to challenge HMRC's decision or request that penalties be suspended.
This article explores how HMRC defines reasonable care and takes a brief look at relevant cases relating to careless penalties, and when penalties may be appealed or suspended. Finally, we have set out what we believe to be taking reasonable care when making a claim for R&D tax relief.
What is reasonable care?
Reasonable care is the standard of diligence that HMRC expects a taxpayer to exercise when preparing and submitting a tax return. It doesn’t mean perfection, but it does require a genuine effort to get things right, based on the taxpayer’s abilities, knowledge, and circumstances.
HMRC’s own Compliance Handbook (CH81140) states the following:
People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances, taking into account the ability and circumstances of the person in question at the time the irregularity was submitted to HMRC.
What constitutes reasonable care will differ depending on the particular circumstances of the taxpayer. This is made clear in CH81140 which states:
Whilst each person has a responsibility to take reasonable care, what is necessary for each person to discharge that responsibility has to be viewed in the light of that person’s abilities and circumstances.
Relevant Cases
A recent First Tier Tribunal (FTT) case which involved a claim for R&D tax relief examined the principle of reasonable care. H&H Contract Scaffolding Ltd v HMRC [2024] UKFTT 00151 (TC) involved a company which had made an R&D claim based on professional advice. The claim was denied and HMRC alleged carelessness. However, the Tribunal found the inaccuracy was not careless as the taxpayer had demonstrated reasonable care. The burden of proof in establishing carelessness rested with HMRC, which they failed to meet.
Whilst the company did not contest HMRC’s view that the claim was invalid, it appealed HMRC’s decision to levy a careless penalty (amounting to £6,632.01). The appeal was based on the following grounds:
- The company had used what it understood to be a competent R&D advisory firm.
- The company was introduced to the adviser at events hosted by the company’s professional body.
- The company provided accurate information to the adviser.
- The company did not seek advice from a layperson but had sought advice from an advisory firm that had acted for others operating in the same industry.
The Tribunal did not accept HMRC’s assertion that the company had been careless. It was stated that ‘The Tribunal does not accept the Respondents' case that where the taxpayer cannot show that it qualified for a given relief then it follows that the taxpayer will have been careless, since that would entail the mere existence of an inaccuracy determining that the same inaccuracy was careless’.
In conclusion, the FTT found that the company had proved ‘on the balance of probabilities that it took reasonable care to avoid an inaccuracy’. The appeal against the penalty was upheld.
Another example of where the concept of carelessness was examined was found in Mr J R Hanson v The Commissioners of HMRC (UKFTT 314, June 1, 2012). In 2006, Mr Hanson sold his business and received loan notes, later disposed of in 2008–09, realising a large capital gain. On his accountants’ advice, Mr Hanson claimed hold‑over relief to reduce his CGT liability. HMRC determined the relief did not apply, resulting in £83k in additional CGT. In addition, a penalty of £14,000 was levied for a careless inaccuracy under Schedule 24 of FA 2007.
Mr Hanson appealed on the grounds that he had taken reasonable care by hiring reputable professional advisers, and that he shouldn’t be penalised for their error. Mr Hanson asserted that he:
- Employed a reputable, experienced firm
- Relied on their advice within their expertise
- Had no reason to doubt their competence or the advice given
Mr Hanson’s appeal was upheld, and the penalty was cancelled.
Suspension of Careless Penalties
HMRC can suspend penalties for certain types of non-compliance under specific conditions. This normally applies to penalties for careless errors in tax returns or documents.
A suspended penalty means HMRC has agreed not to charge the penalty immediately, provided the taxpayer meets certain conditions within a set suspension period (typically up to 2 years). Penalties for deliberate behaviour cannot be suspended.
Suspension conditions must reflect the specific circumstances of taxpayer behaviour, but can typically include the following:
- Filing future tax returns on time
- Paying all liabilities by statutory deadlines
- Maintaining or improving business records
- Using an accountant or adviser
- Implementing better internal checks or systems
Suspension conditions are not automatic, and HMRC may deny the taxpayer penalty suspension. HMRC must be able to set at least one specific suspension condition that would help a person to avoid becoming liable to a further careless inaccuracy. If it cannot set any conditions, it can opt not to apply suspension of the penalty. However, this decision can be appealed.
Can a careless penalty be appealed?
In short, yes. Careless penalties are routinely appealed, sometimes successfully.
Once HMRC has issued a careless penalty, the taxpayer will normally have 30 days in which to appeal. This appeal is normally made to the officer that has issued the decision. Late appeals are accepted, but good reason must be given.
Should HMRC uphold its decision, an appeal can be made to HMRC Solicitor’s Office and Legal Services (SOLS). This is where (in HMRC’s own terms) an impartial officer will review the case. Should the decision remain upheld, the taxpayer has the option of appealing to The Tribunal.
What is Reasonable Care when making a claim for R&D tax relief?
As many readers will be aware, HMRC’s has significantly increased its compliance activity in relation to R&D tax relief. We have seen many instances of HMRC levying careless penalties – some of which were substantial. It’s therefore imperative that claimant companies take steps to ensure adequate care is taken when preparing a claim. We consider the following steps to amount to reasonable care when making a claim for R&D tax relief:
- Understand the R&D scheme. In particular, a full and thorough understanding of the BEIS (2023) Guidelines is paramount. HMRC will routinely ask companies that are subject to a compliance check if they have read and understood the BEIS Guidelines.
- Maintain adequate records. Although there is no statutory requirement to keep additional records when making a claim for R&D relief, there is a growing recognition that records should be well maintained. These may include time sheets, project notes, project plans and emails which evidence the project’s existence.
- Use a competent adviser. This is a particularly important point given the well-publicised stories of rogue R&D advice in recent years. Credentials should be checked and second opinions should be sought if the company opts to use an advisory firm.
- In relation to the above point, all documentation produced by the adviser should be thoroughly checked and reviewed prior to the claim being submitted.
As HMRC continues to tighten its approach to R&D tax relief claims, claimant companies must ensure that they have taken reasonable care when preparing their claims. Whilst penalties for careless errors can be significant, they are not inevitable. As shown in recent FTT decisions, they can be successfully challenged where genuine efforts have been made to comply. The key lies in understanding the increasingly complex rules, maintaining appropriate records, seeking qualified advice, and reviewing all submissions carefully.
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