HMRC audit activity

Further to our previous warning that HMRC had recruited and redeployed case workers into R&D compliance following criticism by the National Audit Office, we are now seeing that translate into live audit activity.

Similar to other firms we have received more R&D enquiries in the last three months than we have had in the last decade. There is very little pattern to the enquiries opened, however at the moment most of the enquiries relate to claims with qualifying expenditure in the sub £50k category (i.e. at a level which might have been previously considered lower risk). These cases are being worked by HMRC employees who appear to have little R&D or enquiry experience and this is making it difficult for us to progress the enquiry process without having to spend significant time dealing with laborious and often unnecessary correspondence.

HMRC have acknowledged that their service standards, specifically in relation to R&D enquiries are below par, however this is not immediately translating into any discernible improvement. We are currently considering making representations to HMRC via the Chartered Institute of Taxation and ICAEW with a view to helping improve matters – however this will not be a quick process. The challenge for HMRC is that promoters of dubious claims continue to play an active role in the market place and clients should ensure that they consider undertaking due diligence on any prospective adviser in this area before proceeding.

We strongly recommend that clients considering making R&D claims ensure that their submissions are carefully thought through with a suitable amount of disclosure. Claims with little or no supporting information are now almost certain to be picked for HMRC audit, even if the sums of tax involved appear to be low. HMRC’s view is likely to be that due to the size of the claim the company is less likely to have properly prepared a robust supporting position and be more likely to withdrawal the claim without putting up much of a fight. We anticipate that whilst the currently inexperienced members of HMRC’s R&D compliance team cut their teeth on smaller claims they will eventually move onto medium sized and larger claims in the future.

Clients that wish to withdrawal their R&D claims once the enquiry has been opened due to the ongoing costs need to consider a variety of factors before ultimately deciding to do so. This includes HMRC’s desire to consider penalties plus the possible inclusion of multiple prior year claims in the settlement process via the so called discovery provisions.

One of the consequences of HMRC’s changing attitude over the last twelve months is that we are learning which areas of the process HMRC are looking for more comfort on when R&D claims are prepared and we are building these into new submissions – the net result is R&D claims are taking longer to prepare as there are an increased number of risks to consider. Clients should therefore consider supplying their R&D information to their advisers earlier than normal to ensure that the team here has the appropriate amount of time to provide advice at the level expected and still meet the required deadlines.