The world of Research and Development (R&D) Tax Reliefs has experienced a seismic shift in recent months, this is due to a new approach adopted by HM Revenue & Customs (HMRC) in late 2022. This sudden change has left companies and R&D advisors struggling to adapt and secure their tax relief they believe they deserve. Signature Tax Innovations, has delved into the implications of HMRC’s new tactics and explored the potential consequences for the industry in this article.
A Targeted and Cynical Approach
Previously, the process for securing the success of an R&D Tax Claim that was in an enquiry involved a back-and-forth negotiation between claimants and HMRC, typically resulting in the claimant agreeing to reduce their claim in exchange for HMRC’s acceptance of the company’s eligibility. However, the new approach is characterised by a series of targeted actions, with HMRC seemingly selecting companies based on their Standard Industrial Classification (SIC) code and claim size.
Moreover, R&D advisors report receiving templated letters from HMRC that often disregard any supporting narrative provided at the time of claim submission. HMRC’s attitude has also become markedly more cynical, with a default assumption that none of the claimant’s work is eligible for relief.
A Time-Crunched Process
Adding to the challenges faced by claimants, HMRC has tightened the timeframe for R&D tax relief enquiries. Deadline extensions have been reduced to just a few weeks, putting companies and their advisors under immense pressure to respond to enquiries.
Standardised Arguments and Lack of Flexibility
The new HMRC approach is marked by standardised arguments against claimants, revealing a one-sided training of case workers. This lack of flexibility and unwillingness to acknowledge valid claims is a stark departure from previous practices, leaving the industry scrambling to adapt.
HMRC’s Denial of Relief: Common Justifications
The combination of a more cynical attitude, shortened deadlines, and the use of standardised arguments has led to a significant increase in the number of R&D tax relief claims being rejected in their entirety. This has caused immense frustration and concern among companies and their R&D advisors.
HMRC has employed various justifications for rejecting relief in R&D tax relief claims. Common reasons include the lack of a project in place, the absence of contemporaneous evidence of the project, and the claimed advance being achieved by other companies. HMRC’s scepticism and stringent criteria appear to focus on finding reasons to deny relief as much as possible.
Reasons Behind HMRC’s New Approach
A combination of factors has likely driven HMRC’s new strategy for R&D tax relief enquiries. Firstly, negative media coverage emphasising the misuse of the R&D tax relief scheme may have prompted an overcompensation by HMRC, who now seek to counteract the perception of leniency by adopting a more stringent and thorough approach. Secondly, political considerations may play a role, as HMRC has pledged to release the findings of its Mandatory Random Enquiry Programme (MREP). These results could potentially support the discontinuation of the SME scheme in favour of a consolidated scheme based on RDEC, which would probably be more cost-effective for the Treasury.
Navigating the Current Situation
While the situation may improve with the introduction of a new R&D tax relief scheme in the future, companies and R&D advisors must adapt to the current circumstances. First, advisors should allocate dedicated resources to managing and coordinating enquiries, ensuring they are well-equipped to handle HMRC’s rigorous scrutiny. Second, companies and advisors should do all it takes to ensure that they gather the necessary detailed evidence to highlight the qualifying activities to HMRC in relation to science and technology and avoid being generic in their responses.
HMRC’s sudden shift in its approach to R&D tax relief claims has sent shockwaves through the industry. This new, more aggressive stance has left companies and R&D advisors reeling, as they are forced to navigate a less cooperative and more time-sensitive landscape. As the consequences of this change continue to unfold, it remains to be seen how the industry will respond and adapt to the challenges presented by HMRC’s new tactics. If you are struggling with defending your R&D claim and believe that the work you have undertaken is genuine R&D for tax purposes, contact Signature Tax to guide you through the complexities to achieve a successful outcome for your business.