In the second of a three article series on R&D, James discusses the current volume compliance approach being utilised by HMRC.
Following what HMRC describe as an “organised criminal attack” on the schemes in April last year, HMRC have formed a new “R&D Tax Credit Compliance Team” which has started a large number of enquiries into R&D claims. We now know that this is what HMRC call a “volume compliance approach” which has been used in other areas of taxation with great success for HMRC in the past.
However, there are serious concerns within the tax profession about the way this team are conducting these enquiries, primarily because R&D is a specialist and highly subjective area on which a suitably experienced person needs to make a judgment call on whether something qualifies. These volume compliance operatives have no R&D experience and are used to working on a formulaic approach, which is quite simply not appropriate for this relief.
This is what we and other advisers have seen so far.
Enquiries seem to be targeted primarily at smaller claims in the IT sector, but it is likely that (if this approach continues) they will move on to other sectors in due course.
Correspondence is issued by post from the team with no named officer making it very difficult, if not impossible, to speak to someone at HMRC to discuss the enquiry in detail. Information requests are extremely detailed and follow a template format, often asking many questions which are actually addressed in the originally submitted report. Requests for meetings to discuss the R&D are denied.
In terms of the questions they are asking, these do very much fit into the format of the new additional information form (which will be discussed in my next article), so it has at least been a little helpful to get more of an idea than ever before of what exactly HMRC are wanting to see when they review an R&D report.
However as things have progressed, we have seen further serious issues with the conduct of this team, with a strong feeling among most firms that the outcome is a foregone conclusion, and indeed we are now starting to see HMRC closing enquiries and assessing penalties of between 15-30% of the tax at stake on the basis of “careless” behaviour – judging that companies were careless to seek professional advice rather than ask HMRC directly for advice on claiming (which incidentally is not even an avenue of advice that is available for smaller companies!)
The Chartered Institute of Taxation has written to HMRC with a long letter expressing the many serious concerns with this approach, and that letter has this week been made public https://www.tax.org.uk/r-d-tax-relief-crackdown-deterring-genuine-claims-institute-warns. Suffice to say there are many more problems than I can fit into a short website article!
In the coming days and weeks it will be interesting to see how things develop and whether the public letter will attract wider media interest and force HMRC to take a serious look at this compliance process.
In part 1, James discussed recent changes to the reliefs which apply from April 2023 onwards, as well as some future changes: https://www.randall-payne.co.uk/news-page/rd-tax-relief-reform-of-reliefs-part-1/