Challenges Posed by HMRC Enquiry

There has been a considerable increase in HMRC’s scrutiny of claims, with bona fide claims being rejected on the basis of a disputed interpretation of the relevant provisions. This in turn has caused considerable commercial anxiety for businesses that may have based their planning on what was a previously settled view of the law. Our advice to the regulated R&D advisers who are making legitimate claims is to not give up!

Here is just one of the testimonials we have received this month:

“YesTax assisted us when our most recent R&D tax relief claim was subjected to an enquiry from HMRC. Two detailed letters were sent to HMRC, responding to the questions they had posed. Crucially, YesTax also understood the process of HMRC enquiries and were able to advise on the overall strategy and tone of the responses. This proved extremely successful, and the enquiry was closed with no amendments made to the claim. We are very pleased with the enquiry resolution service offered by YesTax. The friendly, professional service offered by John and his team helped us overcome all uncertainties, and our strong working relationship will continue for many years to come. YesTax are a very decent and honest company and working partner.” 

It does appear that HMRC is adopting a number of interpretations of the guidelines that have made it into standard letters, but do not necessarily address the issues that exist.

We have recently been working with the brilliant Rory Mullen KC at Old Square Tax Chambers, who has provided some invaluable advice in respect of some of HMRC’s interpretation of the guidelines. For more information on this, please do not hesitate to contact us at hello@yes.tax.

Some of the key areas addressed by Rory have included:

• Addressing a gap in the market;
• Uncertainties that are specific to a field of work;
• Advances in a company’s own state of knowledge where details of wider advances are not publicly available;
• Work not advancing scientific or technological capability “as a whole;” and
• Optimisations and fine tuning of existing processes.

Rory’s conclusion establishes that the context of both the relief and the terms used in the Guidelines are important in interpreting their scope of application; they must be considered in conjunction with one another. HMRC’s current strict approach to interpreting the Guidelines may not be correct in every case, and it will ultimately be a matter of applying the facts to what is said in the Guidelines, considering them in the round.

Our advice

There is no getting away from the fact that your most competent technical person is going to have to dedicate several hours to providing HMRC with the answers that they require in the manner that they require them in. The burden of proof falls squarely on the claimant company, and there is no burden on HMRC to defend why a claim has been rejected so it is important to be as organised as possible when defending your enquiry into your R&D claim. 

Previous 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. Today, HMRC does not offer on-site meetings and rarely offers conference calls, meaning it is of paramount importance that you take care with your written answers.

There is no single ‘right way’ in how to respond; however, there are some simple steps that we must take to avoid HMRC rejecting the claim:

1. Provide a clear, concise account of how the company sought or is seeking to achieve an advance in a field of science or technology, through the resolution of scientific or technological uncertainty. Your write up should be prepared with meticulous technical detail of the scientific or technological advancement being sought. The process, product, or service can still be an advance if it has been developed by another company but is not publicly known or available.
2. Start by clearly outlining the baseline in technology that any advance sought was being measured against, and defining the limitations of the (pre-advance) technological baseline.
3. Avoid heavy emphasis on commercial gain or benefits. Just concentrate on the scientific or technological elements and enhancements. HMRC want to know how it has advanced (or sought to advance) the baseline and how the technological uncertainties could not be overcome with routine and off the shelf methodology.   
4. Distinguish between “business as usual” challenges and challenges that go beyond what a company would be expected to encounter in its line of business. A scientific or technological uncertainty exists when your company or an expert on the subject cannot say if something is technologically possible, or how it can be done, even after referring to all the available evidence. This means that your company or experts in the field cannot already know about the advance or the way to solve it.
5. Give documentary corroborating evidence such as test reports, patent applications, grant applications, pictures, videos, schematics, correspondence between suppliers or subcontractors, or internal meeting notes. To tell HMRC how you tried to overcome the scientific or technological uncertainty, you should show that the R&D needed research, testing and analysis to develop it.
6. You need to be able to explain the work you did to overcome the technological uncertainty. This can be a simple description of the successes and failures you had during the project. You should explain why a professional could not easily work out your advance. You can do this by showing that other attempts to find a solution had failed.
7. Ensure the competent professional has read the guidelines and clearly reference them in your response.
8. If the competent professionals have read the definition of R&D in the guidelines as a whole and have not focussed on one paragraph in exclusion to any others and believe that the R&D is qualifying, do not give up.  We have experienced instances where we have been sent an initial rejection letter which can resemble a standard template, and have successfully challenged this to the client’s benefit.

These guidelines are simple to read and are intended to be understood in context by everybody. Keep it simple.

VTFP in Partnership with YesTax