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Does the UK need a new approach to R&D tax enquiries?

Author: Tom Mason

Research published in July 2024 in the International Tax Review has suggested that, according to business owners and tax advisers in the sector, the R&D tax enquiries process is ultimately harming the relief itself.

A fellow expert described the programme of enquiries by HM Revenue & Customs (HMRC) as “increasingly aggressive” – a sentiment echoed by many accountancy firm clients we work with.

While we all accept that something had to give based on the R&D tax landscape of three years ago, this seems like the point that we must question whether this bulk-enquiry and data-driven approach is the right one.

The root of the issue

A caveat must be applied to all calls for a more equitable and hands-off approach to HMRC enquiries into R&D tax relief – the taxman has been stung before.

Before the overhaul of the relief system in 2023/24, error and fraudulent claims had reached a total of 16 per cent of all R&D tax relief paid out – amounting to over £1 billion.

Compliance had to become a major focus for HMRC, regardless of the merging of the existing schemes and additional information required to submit a claim. This was achieved through a three-pronged approach of:

  • Case-specific enquiries
  • Automated flagging of incongruous data
  • Bulk enquiries based on large-scale models

However, this is now causing businesses and their accountants to avoid submitting qualifying claims due to the number of enquiries the R&D sector is facing and the resulting orders to repay large sums – detracting from the overall aim of the scheme.

The issues facing accountancy firms

The issue that we most commonly see is that the relief and its enquiry processes are so complex that trained and experienced accountancy teams struggle to apply all the relevant requirements.

In particular, firms face issues relating to:

  • Confirming qualifying expenditure on an individual basis
  • Defining R&D in emerging and highly technical sectors
  • The Additional Information Form
  • Being misled by unscrupulous operators in the advisory space
  • Proving client compliance in the face of enquiries by HMRC

As a result, firms are finding themselves ill-equipped to act as a bridge between their clients and HMRC and therefore avoid submitting or aren’t able to defend clients effectively against enquiries into valid claims.

The argument for stability

On the flipside is the point that we’re now approaching a period of stability for the UK’s R&D tax landscape and further changes are likely to be destabilising.

After a period of initial fervour, it’s likely that enquiries will slow down as businesses and their accountancy firms adjust to the merged scheme and enhanced submission requirements – something which will be hampered by further changes to the enquiry scheme.

The research also described HMRC’s enquiry programme as “indiscriminate” which, in a way, is a positive move. It demonstrates that the bulk enquiry efforts are working as planned, and automated data analytics are not singling out businesses from certain sectors, for example.

Ultimately, it seems that this approach to claim handling for R&D tax relief is having the desired effect, even if it’s also having negative knock-on effects.

Rather than overhauling the enquiry programme again, the most effective option is likely to be for firms to focus on compliance, while working with the specialists to devise a strategy to tackle enquiries as they arise.

However, the best way to manage an enquiry is to avoid it arising in the first place – most effectively achieved by getting claims correct upon first submission!

This is where we come in. For bespoke guidance on submitting R&D tax claims for your clients, please contact a member of our advisory team today to get started.