For accountants and innovative businesses that seek out the services and support of a legitimate R&D tax consultant, HM Revenue and Customs (HMRC) should have no cause to launch a discovery assessment.
However, we know that there are less experienced and less scrupulous agents so it is entirely possible that you or a client might be facing an HMRC discovery assessment for an R&D tax relief claim that has been previously filed.
It is therefore good to understand what an HMRC discovery assessment is and how to handle one.
What is an HMRC discovery assessment?
HMRC will only launch discovery assessments when they have a strong suspicion that wrongdoing has occurred.
As with many other sectors, the likeliest catalyst for this is an underreporting of finances in an attempt to pay less tax or recoup more of a benefit.
For R&D tax relief, the most common issues involve a business understating its profits, overstating its losses or overstating a claim.
As we recently noted, there is a cutoff point for historic enquiries and HMRC has to act swiftly if they feel that wrongdoing has occurred.
Given the severity of the wrongdoing suspected when an HMRC discovery assessment is launched, the thresholds are different than with regular enquiries.
Schedule 18 of the Finance Act 1998 specifies in paragraphs 41 to 46 that there is a limit of four years from the end of an accounting period for a simple error, six years for carelessness and 20 years for deliberate behaviour such as fraud or wilful neglect.
In cases where an HMRC officer discovers that something hasn’t been assessed, an assessment is insufficient, or relief has been given but is now excessive, they are at liberty to begin a discovery assessment to determine the full extent of the issue.
What should I do if facing an HMRC discovery assessment?
The best thing that you can do is seek professional help from an R&D tax consultant more familiar with the system and with a better reputation than whoever advised you in the first place.
It is sometimes possible to challenge a discovery assessment and you do not necessarily need to accept the point of view of HMRC as fact.
HMRC can only launch a discovery assessment if they could not have been aware of the malpractice at the time that the claim was submitted.
If HMRC have failed to launch an enquiry into an inappropriate R&D tax relief claim despite clearly needing to do so, they do not get to have another go at it with a discovery assessment.
Similarly, if the original filing was made in accordance with the prevailing practices of the time, then HMRC cannot raise a discovery assessment.
This was determined in the tribunal case of Stage One Creative Services Ltd v HMRC [2024] UKFTT 1059 (TC) and serves as an important reminder not to act on HMRC’s orders without seeking expert advice first.
A discovery assessment, if successful, can result in you facing a penalty for the erroneous filing.
Carelessness carries a lighter penalty than deliberate errors, but they are all painful for businesses that should be endeavouring to stay compliant with all tax filings.
If you are aware that you have made a mistake or acted on poor advice, then you are at liberty to make a voluntary disclosure.
This can lessen the penalties you face although it will still be necessary to rectify the financial disparity between what you were entitled to and what you claimed.
The best way to avoid discovery assessments is to submit R&D tax relief claims that you can trust and which are vetted by expert R&D tax consultants.
We are on hand to ensure that all R&D tax relief claims are legitimate and to prevent any that are not from being seen by HMRC.
If you want R&D tax relief advice you can trust, speak to our team today!
