R&D TAX Credits: Tips To Avoid An HMRC Enquiry

5 Tips to avoid an HMRC enquiry

An enquiry (compliance check) is when HRMC starts investigating a company's R&D credit filling. In most cases, enquiries are preceded by nudge letters from tax investigators seeking extra information about your claim.

There has been a spike in fraudulent R&D tax claims in the UK. Several causes have contributed to this trend, one being that the tax advice market has been filled with consultancy firms that claim to be experts when they are not.

The government and HRMC will continue to crack down on abusive R&D Tax claims. The body has added over 1300 new staff members in the past few years to boost its capacity to pursue tax collection and avoidance.

This body is focused on abusive or fraudulent claims, and other fillings with obscure financial errors and technical explanations are scrutinized. The outcome is that an increasing number of submissions lacking bulletproof financials and watertight technical narratives are attracting unwanted attention from HRMC. As a result, HRMC has since paused payouts from April to investigate and ensure all payments are made correctly.

An enquiry from the HRMC can be a time-consuming and costly process. Regardless of this doom and gloom, I have good news for you. You can do multiple things to avoid HRMC enquiry and haste the R&D Tax credit payments.

Here is a list of things you can use to ensure your organization does not fall victim to HRMC inquiry and has to pay hefty tax credit fees.

1. Always use a prominent specialist advisor to deal with your R&D claim

One main factor contributing to an HRMC examination is self-formulating your individual R&D tax credit claim or inexperienced accountancy practices. Most of the time, as a business owner, you make the mistake of approaching your accountant or lawyer with the R&D claim. This often happens because you don't understand how it works and therefore has no idea where to begin.

Recently, a growing number of claims have been made using prevailing text that is precisely by the same specialist across different claims.

In most cases, avoid advisors who send you forms to fill out about your project description via online portals.

If you want to claim R&D tax credits, it is vital to have a reputable specialist advisor handling your claim. When choosing one, ensure they have experience with R&D tax reliefs. These people aren't just your usual HRMC inquiry agents and will be familiar with the requirements for claiming R&D tax credits.

The best way to avoid this problem is to seek advice from your experienced specialist early in your business development plan. They help you in the following ways-

v They explain what it takes to get approval for a claim.

v They help you structure your proposal.

v They guide you through the process from start to finish.

2. Provide HRMC with a robust technical narrative

HRMC can make several inquiries when it comes to R&D tax credit claims. The most common are:

v Does the company have a valid R&D tax credit claim, and if so, what's the claim's status?

v Is there a dispute over whether the R&D claim is valid or not?

v What are the company's plans for the next 12 months?

v How long it takes your company to develop new products, as well as how long it takes you to bring them to the market?

A high-quality technical report is achieved by undertaking a high-level assessment of the risks that could impact your business. Make sure you include all the relevant information in your narrative, including

v Your business processes.

v the nature of risks associated with your approach and any regulatory requirements that may apply to your business.

HRMC regularly examines an R&D claimant’s website for consistency; therefore, a claimant must show they are on the right track by demonstrating they understand all rules. An example is whether an alleged brand-new product development shown on the company's website as mature is being sold, which is evidence that the R&D stage has already ended.

3. Don't make your R&D claim sound like a marketing document

A common mistake of R&D claimants is using their claims to promote new products or services. This can be seen in many ways:

v Claiming credit for activities that have nothing to do with the research itself and claiming credit for actions that taxpayers or its employees did not carry out.

No matter how much you have spent developing your idea in your business plan, it's important to remember that this document is not marketing. It is not made to tell people what they need to know about your business or how much you have spent on development. T

A claimant focusing on the marketing accomplishments of the organization risks darkening the R&D components, making it a challenge for HRMC inspectors to unravel the R&D eligibility. It is essential to note that HRMC is only interested in the technical advance, uncertainties and how you can resolve them.

 

4. Remember that R&D claims are made yearly

The organization must be aware of all activities and expenditures incurred on R&D projects to keep records for submission. R&D activities such as seminars, workshops, conferences, publications, and other forms of communication with external stakeholders should be recorded accurately.

Remember that R&D claims are made annually and subject to audit; therefore, a claimant has to provide a clear statement detailing the advances sought in the actual claim year. Failure to not articulate these advances properly could raise the alarm to HRMC that the R&D activity might have been completed during the preceding year.

It is essential to have the knowledge that R&D start when the work to resolve the scientific or technological uncertainty begins, and it is critical not to keep referring back to the former year.

5. You should clearly state the methodology used to prepare your R&D claims

The report submitted to HRMC has to be easily understandable. A straightforward claim is proof of credibility and brings about confidence.

For example, if you have used a peer-reviewed journal as a source for your R&D claims, you must quote the relevant article number and the page number. Include a reference in your report if you used another publication as a source.

As a claimant, be aware that the validity of R&D rests upon the opinions of competent professionals in the technology field, which is the key focus of your claim. HRMC is looking for details of professionals who judged the activities you qualify as genuine under the R&D guidelines.

It is also essential to include an accurate description of the methodology used to calculate your results (ideally in the abstract). This should include information about how data was obtained and analyzed and whether data were pooled together or separately at each stage of analysis (pre-test and post-test).

Final thoughts

The more you do now to minimize the risk of an enquiry, the better your future. A reputable specialist advisor, preparing a robust technical narrative, making claims annually, focusing your claim on technical advances and uncertainties, and clearly stating the procedure of the R&D claim formulation are the best ways to avoid enquiry from HRMC.