R&D Tax Relief Enquiry - What to do if a Claim is Rejected
In our previous two articles, we explored what you can expect from an R&D tax relief enquiry from HMRC, as well as our tips on how best to deal with an enquiry. In our final article of the three in the series, we advise what to do if you find that your R&D tax relief claim has been rejected.
If HMRC are not satisfied that the company’s projects meet the qualifying conditions, then the R&D claim will be rejected and HMRC will write to you regarding “Establishing Behaviours” to determine whether a penalty is appropriate.
Penalties
The penalty measure exists to ensure proper care and attention is taken when claims are prepared. If it is found that an error was deliberately made or intentionally hidden, the penalty can be as much as 100% of the tax lost. But, if you are responsive and forthcoming with information when an error is identified, the penalty can be reduced to reflect this cooperation.
If an error is found in an R&D tax credit claim, but it can still be shown that reasonable care has been taken in the claim’s preparation, HMRC may choose to apply a penalty of ‘nil’. There are also abatements and reductions for good behaviour. Good behaviour is assessed based on your sincerity and responsiveness in the event that errors are found.
Penalties can also be suspended while the reason for the tax claim error is being investigated by the R&D company in question. HMRC could, for example, ask the R&D company to improve their record keeping and set a review date.
Typical questions that HMRC send out to establish the behaviours that led to the “alleged” inaccuracies in your corporation tax return, include:
- How would you describe your level of tax expertise?
- Who collated the claim prior to submission to HMRC?
- Did the company check the legal position directly with HMRC, check HMRC’s guidance or ask your agent? If not, why not?
- Did the company seek any advice about Research and Development? If yes, what advice were you given and by whom?
- How did you check whether the party was a competent professional?
- What verification checks, for eligibility and computation errors, were made by the company on the claim before it was submitted to HMRC?
- What records did the company keep, enabling them to calculate figures included in the claim
- What involvement did the company have in the preparation of the computations submitted with the company tax return?
These letters can be quite unsettling when received. Again, the fundamental point is that this is not personal, and the best advice is to ensure that you cooperate fully.
Replying to Penalty Clauses
If the company cooperates fully with HMRC, having sought the advice of an experienced, regulated agent to undertake the R&D tax relief claim; if it maintains robust records to ensure claims are accurate; if the return was submitted in good faith with full care and attention when assessing the qualifying projects against the BEIS guidelines, then it is very unlikely that a penalty will be charged.
Can you Appeal Against a Decision Letter?
You can appeal against a decision to reject your R&D claim and ultimately you may even wish to go to a First-Tier Tribunal. However, one often overlooked option is ADR.
What is ADR?
Alternative Dispute Resolution (ADR) is a formal mediation process for tax which can often help accelerate a resolution with HMRC. When a case is accepted for ADR, a third-party mediator is appointed to manage the process and ensure engagement on both sides.
In our experience, ADR is a cost-effective and efficient route to dispute resolution and is available to all taxpayers and potentially to all tax disputes.
Why Would Someone Choose ADR?
There are all sorts of reasons why a dispute arises between a taxpayer and HMRC. Most commonly disputes arise because the facts are misunderstood, evidence is incomplete or there’s a breakdown in communication.
ADR is particularly desirable and adds value to cases that have been ongoing for at least 18 months, and whilst it does not guarantee resolution, 80% of all ADR cases are resolved within 120 days.
How Does ADR Work?
We work with a team with accredited mediators placed to support clients and their professional advisors to determine whether ADR is a viable option. Where ADR is a realistic option, these accredited mediators will help manage the process, providing support from the initial application right up to finding a resolution with HMRC. Where needed, they can also provide one of the joint mediators.
The team has extensive specific ADR experience, having been involved in ADR since the initial pilot stage nearly a decade ago and with in-depth knowledge of the Litigation and Settlement Strategy (LSS).
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