What are the main risks that prevent an R&D tax relief claim from being successful?

Sometimes seen as red flags that could cause HMRC to become cautious about an R&D tax relief claim, CIRD80530 outlines some of the key risk factors that can cause an enquiry to be launched.

For accountants looking to help their clients make the most of R&D tax relief claims, it is vital to understand what these risks are and whether they can be successfully mitigated.

What does HMRC see as a risk for an R&D tax relief claim?

Given the slightly unsavoury history of R&D tax relief claims, there has been a concerted effort to ensure they are exclusively used for legitimate means.

This has resulted in tighter compliance monitoring that has worked to lower the amount of R&D tax relief claims being submitted while still preserving the amount awarded by the scheme.

Part of this move towards tighter compliance involves launching random enquiries through the Mandatory Random Enquiry Programme (MREP), but also using agent-driven enquiries to challenge suspicious claims.

Regardless of the type of enquiry that an R&D tax relief claim is subject to, if it contains one or more of the core risk factors, then it is likely that this will need to be addressed in order to defend against the enquiry.

The core risk factors are:

• A lack of analysis showing how the proposed relief has been arrived at
• The nature of the trade, meaning that it is not immediately apparent how the work could be R&D
• The solvency position of the company
• Ineligible projects being included

On their own, risks do not condemn an R&D tax relief claim, but they will need to be managed effectively.

How can risks be managed in R&D tax relief claims?

A lack of understanding around eligibility can result in some R&D tax relief claims being submitted with ineligible projects included.

These can be the result of work done in an ineligible field, such as education or humanities.

It may also be that no evidence of scientific or technological uncertainty exists, such as if the solution or knowledge sought is routine, publicly available or otherwise extant.

There is no way to salvage anything connected to a project that should not have been included in the first place and it will be necessary to excise it entirely from the R&D tax relief claim.

Similarly, the solvency of the company can be a barrier, as only companies that are going concerns are eligible to receive R&D tax reliefs.

The other risks are likely issues when innovative businesses or the accountants who help them are not experienced with managing R&D tax relief claims.

Factors like the nature of the trade are easily managed with a well-written technical narrative to illustrate why the work is valid, even if the point of origin is unusual.

Additionally, costs being inelegantly explained or the explanations being absent can be rectified, provided they were done accurately in the first place.

As R&D tax consultants, we can assist with improving the quality of R&D tax relief claims and ensuring that risks are managed effectively.

We specialise in explaining to HMRC why niche sectors are capable of producing legitimate R&D and we defend valid R&D tax relief claims from enquiry.

Get in touch to become more confident in handling higher-risk R&D tax relief claims.

Adam Bointon