Is HMRC Focusing on Quality R&D Claims?
In recent times, the implications of His Majesty's Revenue and Customs' (HMRC) crackdown on Research and Development (R&D) tax credit claims, which commenced in October 2022, have become increasingly apparent. This development has led to the disallowance of claims from businesses that attempted to exploit the system or have errors, as well as firms with legitimate R&D activities that claimed what they were rightfully entitled to, but unfortunately are caught in the catch-all trap. This situation highlights the need for businesses to exercise caution and ensure compliance with relevant regulations when claiming R&D tax credits.
Several Members of Parliament (MPs) have raised questions regarding this issue. John Baron MP summarised the sentiment, stating, "In HMRC's effort to clamp down on fraud and error, there is a general view building, particularly coming from start-ups and small businesses, that it is putting economic growth and innovation at risk by rejecting legitimate claims for R&D tax relief."
Jim Harra, HMRC's First Permanent Secretary, acknowledged the need to strike a balance between ensuring that R&D tax relief achieves its objectives of promoting innovation and investment while protecting the Exchequer from error and fraud. Harra commented on the challenges facing HMRC, stating, "Our aim, obviously, is to enable legitimate claimants whose claims are accurate to get their R&D payment as quickly and as easily as possible, while preventing the non-compliant claims from going through. Most non-compliant claims have some relief due, just not the amount that is being claimed, but some - about one in seven claims in the small business scheme, in the mandatory random inquiry programme that we carried out - were not due any relief at all in our view."
Another challenge Harra highlighted was the lack of technical expertise within HMRC's workforce, stating, "My people are tax inspectors. They are not software engineers or rocket scientists, and they meet a vast range of claims in areas in which they do not have expertise." While the new online process of Additional Information Forms (AIF) is a statutory requirement to help HMRC risk-assess new claims, the necessary expertise in each particular industry field presents a challenge in preparing R&D tax credit claims.
To address these concerns, HMRC acknowledges the need to refine their criteria for determining what constitutes genuine R&D activities and to provide comprehensive training for staff across various industry sectors. HMRC intends to collaborate with relevant government departments to leverage their subject matter expertise where available to ensure claims related to innovation within a particular sector are properly evaluated.
Furthermore, HMRC has proposed establishing an external advisory panel comprised of industry experts to support the administration of R&D tax relief programmes. This panel would be utilised in instances where the requisite technical knowledge is not readily available within HMRC.
By proactively seeking guidance from authoritative sources, both governmental and the private sector, HMRC aims to enhance their ability to accurately assess R&D claims and apply the appropriate tax incentives equitably. This strategic approach underscores HMRC's commitment to facilitating a fair and well-informed process for companies engaged in qualified research activities across multiple industries.
At Momentum Group, we are committed to staying up-to-date with the latest developments and changes in legislation and continuously employ talented professionals. We take pride in our processes to better serve our clients and ensure they receive all the benefits they are legitimately entitled to.
If you believe you may be undertaking activities that could qualify for R&D tax credits or would like a second opinion, please contact us today at taxcredits@momentumni.com or call our head office at +44 (0)28 9140 4030.
We look forward to hearing from you!
