CIOT Responds to HMRC Regarding the Current Problems with R&D Tax Relief

In the summer of 2023, HMRC and the Chartered Institute of Taxation (CIOT) exchanged lengthy correspondence about the approach being taken by HMRC relating to R&D tax relief claim compliance checks. The CIOT expressed concern about a number of tactics being employed; HMRC’s response was to largely defend the measures being undertaken.

Several months have passed since the exchange of correspondence and YesTax is pleased that a further letter from Ellen Milner, Director of Public Policy at the CIOT, has been sent to HMRC outlining continued concerns. A copy of the letter can be found at https://www.tax.org.uk/ref1260

In this short article, John Moxon Co – founder of Yes Tax highlights three key points from the letter and provides his thoughts on the issues presented

WMBC & ISBC: Inconsistent Approaches

The dreaded brown envelope. Small in size but (potentially) large in impact. By now, we’ve all had them. Even the 100% success guys. A quick scan of the letter reveals which client has got the enquiry. The feeling of dread and disappointment. However, there’s a glimmer of hope. The enquiry has been opened by the Wealthy & Mid-Sized Business Compliance unit (WMBC). Flick to the bottom of the letter; there’s an actual person’s name! Maybe even a direct dial telephone number! A palpable sense of relief around the office. We can win this one.

It was noted in Ellen Milner’s excellent letter to HMRC that there was a wildly inconsistency approach being taken by WMBC and the now infamous Indy & Small Business Compliance Unit (ISBC). The letter states:

We have discussed (an) R&D enquiry case load with several firms and all report on different outcomes experienced in relation to cases selected for enquiry by the ISBC teams compared to the WMBC teams. In nearly all cases the enquiries by WMBC result in an R&D tax relief claim being agreed, albeit in some cases with some agreed changes to quantum. In contrast, the vast majority of the enquiries by ISBC teams result in a rejection of the whole R&D tax relief claim.

The above is precisely the experience of YesTax. There is a startling discrepancy between the approach being adopted by the two units. In addition, there appears to be no apparent reason why certain claims are being handled by WMBC and others by ISBC. Unfortunately, it would appear that the vast majority of cases are handled by ISBC. This unit is the main driving force behind the ‘volume approach’ to enquiries. This term, whilst helpful in indicating that high numbers of enquiries are being opened, does not paint a true picture. The approach is neglectful, dismissive and ill-informed.

Thankfully, the approach adopted by WMBC is wholly different. Evidence presented in correspondence is considered and counterclaims from HMRC are well conceived. CIRD80525 – Practice note for R&D specialist units states that HMRC ‘will be sympathetic and supportive when dealing with queries from companies or when making enquiries into their claims’. You get the feeling that HMRC inspectors within WMBC have this statement pinned to the top of their screens when drafting their enquiry letters.

Right now, the chances of achieving a satisfactory outcome during an R&D tax related enquiry seems to be almost entirely dictated by which unit is handling the compliance check. This is unacceptable.

Can I Talk to Someone?

On 31st October 2023, HMRC issued new guidance on claiming R&D tax relief. Contained within the guidance was the following:

If HMRC open a compliance check into your R&D claim, we may ask for anything reasonably needed to evidence your claim. This may include, but is not limited to:

• seeing relevant documents
• visiting the site
• examining prototypes and final products
• talking to employees

CIRD80525 – Practice note for R&D specialist units also states the following:

During the course of an enquiry into an R&D claim, an officer from a specialist R&D Unit will normally make arrangements to discuss the claim with the company’s management and technical experts.

Despite the above, the following was outlined in Ellen Milner’s letter to HMRC in December 2023:

We have also seen correspondence from ISBC that says that ‘unless there is a compelling reason we do not see the necessity for meetings’.

From the above, and from the experience of YesTax, it is patently clear that HMRC are not following their own guidance on meetings or conversations with claimant companies. Every HMRC enquiry response letter from YesTax has offered HMRC a meeting with the claimant company and its competent professionals. Not once has this offer been accepted. Claimant companies are incurring great cost and time in compiling detailed responses to HMRC’s compliance check questions, but, in almost all ISBC cases, this evidence is routinely ignored and not interrogated. It follows that a sensible and cost-effective approach would be hold a meeting or conference call to understand HMRC’s concerns, and present information to counter any such doubts. The ‘volume approach’ has now been ongoing for 12-18 months, but I have still yet to speak to anyone at HMRC about an R&D tax claim enquiry.

HMRC have cited the ‘complex nature’ of R&D compliance cases as a reason for not having calls or meetings; YesTax strongly believes that complexity is exactly why calls (or other in-person engagement) are needed.

Collateral Damage

Ellen Milner’s letter also talks of the ‘collateral damage’ being caused by HMRC’s volume approach. The letter states:

HMRC may consider the approach to be a success in many respects, because it is stopping a large number of claims. Many of those claims may be incorrect but there are a large number of valid claims, and some that are more nuanced and require specialist consideration, that are being rejected or withdrawn (or subject to uncertainty, and frustrating and burdensome enquiry processes) because of the approach. This ‘collateral damage’ may come to undermine the perceived success in due course.

This is a salient point and one which YesTax can attest to with firsthand experience. Earlier in the year, a YesTax client received a compliance check letter for a claim it had recently submitted. The company was a sizable entity and had made the claim under the RDEC scheme as the SME size threshold was breached. Two R&D projects formed the claim, with qualifying expenditure amounting to around £100,000. The tax benefit of the claim was less than £10,000. The company’s CT liability for the relevant period was in excess of £500,000. 
A meeting was held with the client to discuss a response to HMRC’s standard opening letter. (in which there was no reference to any of the information already provided in the R&D report).

It was at this point that the client opted to concede on the claim. The tax benefit generated by the claim was immaterial to the company and it was felt that resource could be better spent elsewhere, rather than engaging in protracted and lengthy correspondence with HMRC. The client responded to HMRC stating that although it was confident that the BEIS Guidelines had clearly been met, the company had opted to withdraw the claim as it was aware of HMRC’s unreasonable approach to R&D related compliance checks. This was against the advice of YesTax, but the company steadfastly refused to engage with HMRC.

This is the collateral damage referred to in Ellen Milner’s letter – genuine claimants with qualifying projects opting not to defend claims due to the perceived inadequacies of the compliance check system. In addition, the company stated that it would not be claiming the relief in future accounting periods.

At YesTax, we recognise that the abuse of R&D tax relief is a significant problem, and HMRC should be prioritising measures to tackle it. It is quite clear that the current volume approach is achieving a large amount of success in ensuring poor quality claims are no longer being processed. However, the overall outcomes are not positive.

John Moxon
Founder & Consultant
YesTax