The New R&D Tax Relief Enquiry Landscape

HMRC has recently recruited additional technical resource which has resulted in a dramatic rise in the number of enquiries opened into claims. Enquiries are now longer and more involved, with the requirement to provide substantiating evidence far greater than ever before. HMRC are increasingly likely to open enquiries into claims that have, in the past, been processed with no additional checks being performed.

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.

In the days of yesteryear, 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 are not offering on-site meetings and rarely offer conference calls.

What to expect in an enquiry and how to handle one

In recent months, the enquiries we have seen have always started with the same standard letter which is split into two areas:

1. R&D activities

  • Detail of the number of Research & Development projects claimed for within the period.
  • An explanation of what the scientific or technological advance(s) is.
  • An explanation of what the scientific or technological uncertainties involved in the project were.
  • Detail of how and when the uncertainties were overcome.
  • Detail as to why the knowledge being sought was not readily deducible by a competent professional.
  • R&D Costs and Calculation

2. R&D Costs and Calculations

A breakdown and analysis of the qualifying expenditure using the sub-headings:

  • Staffing Costs (name, job title, wage bill, value, details of the qualifying activities giving a brief description of their role in the R&D project(s). 2. R&D Costs and Calculations
  • Software or consumable items
  • Qualifying expenditure on externally provided workers
  • Sub-contractor payments (name, brief description of their role)
  • Relevant payments to subjects of a clinical trial
  • Any other costs included in the claim to relief
  • For any apportioned costs, the rationale and methodology used to come to this apportionment, with supporting evidence where available.
  • Confirmation that all the amounts included above have been paid and incurred.
  • Any other information which may aid the enquiry.

The letters usually include no reference to any information which may have already been provided to HMRC. In most cases, a full technical report and a full cost breakdown. Has been provided to HMRC with the corporation tax return. However, the opening letter makes no reference to this, so very often the first response is referring HMRC to these documents which were submitted when the claim was filed.

What then follows is normally a more detailed interrogation of the claim, often asking some of the same questions again. In the examples we have seen, HMRC have subsequently requested one or more of the following:

  • Meeting minutes or emails which provide evidence of the work being undertaken
  • Evidence of payment for the costs included in the claim. Many are unaware that there is a payment requirement for R&D expenditure.
  • Copies of grant applications for any projects in receipt of grant funding
  • Details of transactions with related or connected parties
  • Copies of contracts for projects where a customer has placed an order
  • Copies of sales and purchase invoices
  • Details of any patents filed in relation to the technology, and if no patent has been filed, reasons why this has not been considered.
  • A clear identification of all the technological uncertainties including:
  1. The current technological limitations
  2. Current practice and why it falls to resolve the uncertainty
  3. What was the gap in technological knowledge or capacity which necessitated the commencement of R&D
  4. An explanation of the research undertaken to establish these were uncertainties in the overall field of technology that could not be solved by readily deducible methods within a company’s knowledge by information in the public domain
  5. All stages from planning to deployment

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 our expert partners in this area, 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 but 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?

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.

The Way Forward

The current pace of change in the R&D tax sector is unprecedented. Keeping up to date with everything that has happened in the previous two years is a difficult task in itself. Our advice to companies is simple: get it right from the start to minimise the risk of a lengthy and complicated enquiry. Although there is no single ‘right way’ how to make a correct claim, using a qualified, experienced adviser gives the best chance of hassle-free success. Experienced advisers know what HMRC want to see, they know their application and interpretation of the legislation and they understand key risk areas of claims.

In our experience, best practice means a claim that:

  • Provides a clear, concise account of how the company sought an advance in a field of science or technology, through the resolution of scientific or technological uncertainty.
  • Cleary outlines the baseline in technology that any advance sought was being measured against, and defining the limitations of the (pre-advance) technological baseline
  • Avoids heavy emphasis on any commercial gain or benefits. Emphasis on the scientific or technological enhancements is far more important.
  • References the legislation and BEIS guidance throughout the narrative.
  • Gives documentary corroborating evidence such as test reports, patent applications, grant applications, pictures, videos, schematics, correspondence between suppliers or sub-contractors or internal meeting notes.
  • Distinguishes between business as usual challenges and challenges that go beyond what a company would be expected to encounter in its line of business.
  • Does not assume that just because there has been an advance in technology in one year, there will be another one the following year. Treat each year as a new start in reviewing the steps listed above.
  • Gives details of the competent professional, outlining their relevant qualifications and experience in the appropriate field of science and technology.
  • Provides a full breakdown of qualifying expenditure. The costs should also be supported by evidence to satisfy HMRC in the event of an enquiry.

New Guidance for April 2023 Changes – What Should a Claim Include?

In December 2022, HMRC provided further details about the changes which will be affect claims made for accounting periods beginning on or after 1st April 2023. The new guidance outlined the statutory requirements for R&D claims. Under the new rules, claims will not be valid if they fail to include the following:

  • The Unique Tax Reference (UTR) number of the company.
  • Employer PAYE Reference number.
  • VAT Number.
  • Contact details of main internal R&D contact at the company – this is the person from the business responsible for the claim.
  • Main type of business carried out (SIC code).
  • If completed by an agent, the agent reference number (if the agent has one).
  • Contact details of any agent working on the claim.
  • Accounting period start and end dates.
  • Qualifying expenditure under the following categories:
    • employee costs
    • externally provided workers
    • contracted out R&D
    • software
    • consumable Items
    • payments to participants of a clinical trial
    • data licence (for accounting periods starting on or after 1 April 2023)
    • cloud computing services (for accounting periods starting on or after 1 April 2023)
    • contributions to independent R&D costs (RDEC only)
  • Amount of the above that is qualifying indirect activities (QIAs).
  • Number of projects claimed for.
  • Descriptions of the projects under 5 headings:
    • What is the main field of science or technology
    • What was the baseline level of science or technology that you planned to advance?
    • What advance in that scientific or technical knowledge did you aim to achieve?
    • What scientific or technological uncertainties did you face?
    • How did your project seek to overcome these uncertainties?
  • For 1 to 3 projects the company will need to describe all projects, covering 100% of the qualifying expenditure.
  • For 4 to 10 projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described.
  • For 10 to 100 plus projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described – however, if the qualifying expenditure is split across multiple smaller projects, describe the 10 largest.
  • Number of EPWs who worked on the projects.
  • PAYE scheme reference for those EPWs.

We partner with YesTax who have put this circular together and have years of experience of not only preparing R&D claims for our clients, but also in assisting accountants across the UK with HMRC enquiries relating to claims they have made themselves.

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