Talking Tax: May 2022
Author: Adam Spriggs, R&D Tax Director
As the year moves on, we are still awaiting an update from HMRC on how, and what form, companies will need to pre-apply/notify of their R&D claims for accounting periods starting after 1 April 2023 that was announced in the last budget.
Discussions have been ongoing between HMRC and agent representatives as to how this is structured. HMRC have also recently announced a delay in processing tax credit claims as they check ‘irregular claims’, causing HMRC to miss their usual 28 day target for processing tax credits. This has also had an impact on the processing of payments on closed enquiries as well, where it would be expected these wouldn’t have been considered irregular if approved following an enquiry, but goes to the wider impact these delays are having.
With the taking on of over 100 additional staff within the department, HMRC have naturally increased the amount of enquiries they have been opening. Whist the issue of subcontracted and subsidised expenditure can dominate a lot of claims, with more heading to FTT (this will be discussed next month), the handling of an enquiry can be straightforward – as long as the claim was prepared and properly assessed prior to submission. The article below offers some guidance as to things to consider if faced with an enquiry.
Article: What to do in the event of an HMRC enquiry on your R&D claim
Receiving a HMRC enquiry can be daunting, whether its regarding your personal or company affairs, and receiving a R&D Tax enquiry is no different. As with any tax return submitted to HMRC there will always be a chance you may be randomly selected for an enquiry and beyond that your risk decreases with the quality of the report and the information provided. Click here to read our article on how you can decrease your chances of a HMRC enquiry.
However, if you get one you may be asking yourself what do you do next?
Consult your advisor
If your accountant or R&D advisor is registered as your HMRC agent then they too would have received the same letter you have. They will be able to talk you through the key areas HMRC are looking into. If you have prepared the claim yourself, or your advisor does not offer HMRC enquiry defence then now is the time to engage with a specialist and contact us.
More than likely the core of the enquiry will be HMRC seeking more detailed information. This may be:
– Test data or more explanation detailing the iterative testing process that was followed
– Financial transactions – either invoice evidence or understanding how you work with contractors
– Clarification of how the expenditure apportionments have been calculated
HMRC recognise that not all records, beyond financial, of R&D activity are going to be kept – especially if you are claiming for the first time and had no idea what was required. However they have to be satisfied that the R&D activity that has been claimed for has taken place. With your advisor it is important to provide HMRC with as much detail as possible.
It may be that the enquiry process drags on due to points not being able to be agreed upon. Your advisor should advise when it may be the optimum time to arrange a meeting with HMRC to discuss the enquiry in person/remotely in the interests of resolving it.
Penalties & Interest
HMRC would have no doubt included information concerning their ability to charge interest and penalties. Interest will always be charged based on the number of days you are late in paying your CT liability. If you’re a December year end then your CT will be due by 1 October the following year, so if you haven’t made a payment, or a reduced payment, due to your R&D claim then interest may be charged if HMRC adjust your claim value. Interest is currently charged at 2.6% pa.
Penalties are separate and HMRC have discretion to apply these. In most cases, as long as the claim has been prepared with care and the only continuous point is at what point the uncertainty was resolved (as is often the case) then HMRC will not issue penalties – which can be up to 100% of the benefit you sought if HMRC feel the error was intentional and attempts were made to hide it from them.
Only one enquiry
HMRC are, in most cases, only able to enquiry into a claim once. Therefore, even if they are only concerned with one out of the three projects who’ve submitted, or just need to understand how you work with contractors; they’re going to have to ask questions across the entire claim – technical and financial. So don’t be too concerned if HMRC provide a long list of questions, they’re often only focused on a couple key areas.
Don’t panic – Some are straightforward
Many years ago a construction company’s claim increased 5 fold due to organic growth and them working in newer areas. As suspected, they received an enquiry however we were able to have it closed after one response by concisely providing more information on the projects and proving evidence that the costs claimed actually existed by easily providing copies of the invoices.
HMRC have also been known to ask for questions or confirmation of points that have been stated in the claim report. Whilst it can be frustrating to be asked something that has already been addressed, sometimes its overlooked or it may not have been as obvious to an inspector, such as when the uncertainty was resolved.
So don’t panic.