For the next couple of years, we expect HMRC will be tough on companies filing R&D Tax Credit claims. Every year in the UK, about 90,000 companies are applying to the R&D tax relief programme. Of which SMEs take up 82,000 of these.
Many companies are under the assumption that once an R&D tax credit refund is received that HMRC actually reviewed and approved the R&D tax credit claim. However, this is not the case.
Up until 2022, HMRC reviewed very few R&D tax claims for compliance. As a result, the programme proliferated and now HMRC believes a large number of R&D tax credit claims do not qualify. To remedy this, HMRC is substantially increasing their compliance checks.
Many companies are shocked to discover that HMRC is reviewing their R&D tax credit claim after a refund has been received. Then if the R&D tax credit claim is denied, are requesting the refund be repaid, sometimes with interest and penalties.
What is an R&D Compliance Review?
Currently, the focus of a compliance review is the Technical or Science test element of an R&D tax credit claim. In other words, does the R&D project being claimed meet the definition and criteria set out in HMRC’s guidelines.
Typically, HMRC will ask:
- For an explanation of the technological advance and uncertainty (TA and TU).
- Who is the competent professional (CP) in the company?
- Why the knowledge sought was not readily deducible by the CP?
- For evidence of contemporaneous documentation supporting the R&D activities, and how the R&D costs are allocated to the activities within an R&D project.
The R&D compliance selection process by HMRC seems to be random, with no regard to the size of the R&D tax credit claim. In other words, small R&D claims are selected in the same proportion as large R&D claims.
How you respond to a R&D compliance letter request is very important. As an example, when asked to describe the technological advancement, most companies fall into the trap of describing the innovative features of the product or software they developed. This is the commercial advance and not the technological advance; therefore, HMRC will likely take the view the criteria have not been met.
RDP can assist with compliance checks to ensure the correct information is relayed to HMRC.
Have you Received a NUDGE Letter?
In addition to compliance letters, nudge letters are being sent out to companies making R&D tax credit claims. Nudge letters are asking companies to take another look at the R&D claim submitted to ensure the R&D claim meets the criteria. Information on the criteria is provided by HMRC and the company is to then self-assess. The company does not need to respond to the letter, and this letter does not indicate there is anything specific incorrect with the claim. However, the implication is that the company has been warned, and should a subsequent compliance check occur, HMRC will expect the company to have a full understanding of the criteria and be compliant.
RDP’s ICP – Innovation Connection ProgrammeTo help companies with future R&D tax credit claims, we have developed our flagship R&D tax credit platform called the Innovation Connection Program (“ICP”). The ICP identifies and captures eligible R&D work and technical documents. Which supports the R&D claim in real-time throughout the fiscal period.
The benefits of RDP’s ICP are that:
- All R&D is captured as it occurs, so nothing is missed or forgotten, and the R&D claim is maximised.
- The R&D claim is ready at year-end and can be filed immediately.
- Full support is provided when HMRC asks for contemporaneous documentation.
- It is easy to use as we customised it to our client’s needs.
Is your company or is a client of yours undergoing an HMRC R&D compliance check?
If so, please contact us today on 0208 214 1341 or email [email protected]. RDP Associates have considerable experience dealing with the tax authorities on R&D tax credit matters. We have prepared over 10,000 R&D tax credit claims. We have over 35 experienced technical staff in all areas of fields of science and technology. Which include software specialists, engineers, MSC/PhD’s.