HMRC has recently recruited additional technical resource\nwhich has resulted in a dramatic rise in the number of enquiries opened into\nclaims. Enquiries are now longer and more involved, with the requirement to\nprovide substantiating evidence far greater than ever before. HMRC are\nincreasingly likely to open enquiries into claims that have, in the past, been\nprocessed with no additional checks being performed.\n\n\n\nThe burden of proof falls squarely on the claimant company\nand there is no burden on HMRC to defend why a claim has been rejected. \n\n\n\nIn\nthe days of yesteryear, enquiries were often conducted with on-site visits to\nclaimant company premises which negated the requirement for protracted\ncorrespondence. Enquiries were concluded quickly and pragmatically. Today, HMRC\nare not offering on-site meetings and rarely offer conference calls.\n\n\n\nWhat to\nexpect in an enquiry and how to handle one\n\n\n\nIn recent months, the enquiries we have seen have always started with the same standard letter which is split into two areas:\n\n\n\n1. R&D activities \n\n\n\nDetail 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\n\n\n\n 2. R&D Costs and Calculations \n\n\n\nA breakdown and analysis of the qualifying expenditure using the sub-headings:\n\n\n\nStaffing 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. \n\n\n\nThe\nletters usually include no reference to any information which may have already\nbeen provided to HMRC. In most cases, a full technical report and a full cost\nbreakdown. Has been provided to HMRC with the corporation tax return. However,\nthe opening letter makes no reference to this, so very often the first response\nis referring HMRC to these documents which were submitted when the claim was\nfiled.\n\n\n\nWhat\nthen follows is normally a more detailed interrogation of the claim, often\nasking some of the same questions again. In the examples we have seen, HMRC\nhave subsequently requested one or more of the following: \n\n\n\nMeeting minutes or emails which provide evidence of the work being undertakenEvidence 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 fundingDetails of transactions with related or connected partiesCopies of contracts for projects where a customer has placed an orderCopies of sales and purchase invoicesDetails 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:\n\n\n\nThe current technological limitationsCurrent practice and why it falls to resolve the uncertainty What was the gap in technological knowledge or capacity which necessitated the commencement of R&DAn 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\u2019s knowledge by information in the public domainAll stages from planning to deployment\n\n\n\nA\nrecent feature of R&D tax relief enquiries has been the requirement to\nprovide HMRC with \u2018proof\u2019 or \u2018evidence\u2019 that an advancement in technology has\nbeen made. This was a theme which was explored in a recent First Tier Tribunal\ncase \u2013 Grazer Learning Limited v HMRC \u2013 where the tribunal stressed that the\nburden of proof is on the claimant company to demonstrate an advancement has\nbeen made. \n\n\n\nThe\nrequirement to provide proof of an advancement was also a feature in a recent\nenquiry case which was handled by our expert partners in this area, YesTax. The\nresponse prepared by YesTax asked what form this \u2018proof\u2019 may take. The\ninspector dealing with the enquiry could not answer this point. Despite\nstatements from the competent professional at the claimant company outlining\nwhere the advancement was as well as statements from the customer which had\nplaced an order for the technology, the\ninspector was still unable to accept the evidence that an advancement had been\nmade. The case was a worrying example but one thing we learned from this\nexperience is that documentation is key to reducing the risk of an enquiry.\nFailure to keep written records means a reliance on oral evidence which may\nlead to a rejected claim. \n\n\n\nLegitimate\nClaims Lost? \n\n\n\nIn\nthe last two months, we have seen numerous legitimate claims being lost by\ntaxpayers who were not able to supply documentary evidence. HMRC no longer have\nthe resource to conduct meetings at client\u2019s premises where they can \u201csee it\nfor themselves\u201d, enabling them to circumvent the need for demanding levels of\ndocumentation.\n\n\n\nAll\ntoo often, legitimate R&D claimants are unable to dedicate the time and\nresource to defend an R&D enquiry due to the increased amount of time it\ntakes to satisfy HMRC that the claim is valid. It is wrong that HMRC will\npotentially see these cases as being won due to \u2018fraud\u2019, \u2018error\u2019 or \u2018abuse\u2019 of\nthe scheme rather than the clients\u2019 inability to dedicate the time to pursuing\nthe enquiry.\n\n\n\nThe Way\nForward\n\n\n\nThe\ncurrent pace of change in the R&D tax sector is unprecedented. Keeping up\nto date with everything that has happened in the previous two years is a\ndifficult task in itself. Our advice to companies is simple: get it right from\nthe start to minimise the risk of a lengthy and complicated enquiry. Although\nthere is no single \u2018right way\u2019 how to make a correct claim, using a qualified,\nexperienced adviser gives the best chance of hassle-free success. Experienced\nadvisers know what HMRC want to see, they know their application and\ninterpretation of the legislation and they understand key risk areas of claims.\n\n\n\n\nIn our\nexperience, best practice means a claim that: \n\n\n\nProvides 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.\n\n\n\nCleary outlines the baseline in technology that any advance sought was being measured against, and defining the limitations of the (pre-advance) technological baseline\n\n\n\nAvoids heavy emphasis on any commercial gain or benefits. Emphasis on the scientific or technological enhancements is far more important. \n\n\n\nReferences the legislation and BEIS guidance throughout the narrative.\n\n\n\nGives documentary corroborating evidence such as test reports, patent applications, grant applications, pictures, videos, schematics, correspondence between suppliers or sub-contractors or internal meeting notes. \n\n\n\nDistinguishes between business as usual challenges and challenges that go beyond what a company would be expected to encounter in its line of business.\n\n\n\nDoes 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.\n\n\n\nGives details of the competent professional, outlining their relevant qualifications and experience in the appropriate field of science and technology. \n\n\n\nProvides a full breakdown of qualifying expenditure. The costs should also be supported by evidence to satisfy HMRC in the event of an enquiry. \n\n\n\nNew Guidance\nfor April 2023 Changes \u2013 What Should a Claim Include? \n\n\n\nIn December 2022, HMRC provided\nfurther details about the changes which will be affect claims made for\naccounting periods beginning on or after 1st April 2023. The new\nguidance outlined the statutory requirements for R&D claims. Under the new\nrules, claims will not be valid if they fail to include the following: \n\n\n\nThe 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 costsexternally provided workerscontracted out R&Dsoftwareconsumable Itemspayments to participants of a clinical trialdata 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 technologyWhat 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.\n\n\n\nWe\npartner with YesTax who have put this circular together and have years of\nexperience of not only preparing R&D claims for our clients, but also in\nassisting accountants across the UK with HMRC enquiries relating to claims they\nhave made themselves.