Can HMRC open a compliance check into historic R&D claims?

Guest article written by Paul Rosser , Director at Research & Development Consulting Ltd

A report published this week by the National Audit Office (NAO) suggested that, due to missed cases of fraud and error in relation to R&D claims, HMRC might want to go back and audit historic R&D claims.

There is usually a 12-month window from the date an R&D claim is submitted for HMRC to open a compliance check (unless the claim is made via amendment then it’s 12 months from the next quarter day).? But, can HMRC actually go back and look at historic R&D claims where the enquiry window has closed?

Discovery

In some cases, yes they can.? If an HMRC officer discovers new information which leads them to believe that a loss of tax has occurred, and the officer could not reasonably have been expected to be aware of this during the normal 12-month window, then HMRC can open an enquiry into an R&D claim where the normal window has passed.

This is known as a discovery.

How far can HMRC go back after discovery?

How far back HMRC can go depends on the conduct of the claiming company or their agent.

Where it's not due to careless, or deliberate, conduct then HMRC can open an enquiry into any previous period, provided less than 4 years has passed since the relevant tax period.

If the tax loss was due to carless behaviour, then it's any period where less than 6 years has passed, and in the case of deliberate behaviour it's 20 years.

How do HMRC discover new information?

The main way HMRC discover new information is during a compliance check into a company’s current R&D claim.

Or it might be that the company has never submitted any information about their R&D activities and now they have completed the new mandatory Additional Information Form (AIF), this has led HMRC to suspect their historic R&D claims might not be valid.

Common scenarios that could lead HMRC to look at historic R&D claims

No supporting documentation was submitted with the company’s tax return

This was quite common until August of 2023 when submission of supporting documentation via the new online AIF became mandatory.? Before this, a company could simply put an R&D expenditure figure on their tax return and claim the tax relief with no further justification.

The new AIF requests project and financial details in relation to the R&D claim, and this information is allowing HMRC to open a lot more compliance checks, and in some cases simply refuse the claim without a check.

If information on the AIF or discovered during a compliance check leads HMRC to believe that previous R&D claims made by the company were inaccurate, they may be justified in opening an enquiry into historic claims using discovery legislation.

Misleading supporting documentation was submitted with the company’s tax return

If a compliance check into a recent R&D claim suggests that information submitted in support of the claim is dishonest or misleading, then HMRC could use this to suggest that the information supplied with historic R&D claims could also have been dishonest or misleading.

Unfortunately, there are a lot of very clever, dishonest R&D advisors who have been submitting vast numbers of invalid claims over the years and those guys are really good at making non-qualifying R&D sound like it does, which would be misleading to HMRC.

The type of project entitled "The development of rotary powered technology to identify structural irregularities in historic buildings" included in an R&D report, which becomes "We bought a cheap drone with a camera from Amazon to look for cracks in a client’s roof" during a compliance check, as an example.

In some cases, companies weren't even provided with a copy of the documentation submitted with their own tax return, which is always a big red flag.

Accurate and honest supporting documentation was submitted with the company’s tax return

In this instance, it would be much harder for HMRC to use discovery, as they were provided with all the relevant information at the time of the claim.

If HMRC did use discovery to open an enquiry into a claim like this, and if it could reasonably have been expected on the basis of information available to them at the time that they would be aware of the loss of tax during the normal enquiry window. Then the discovery would be invalid.

At the time of writing there is insufficient evidence to confirm if HMRC will be looking to open enquiries into historic R&D claims, as the NAO suggests. But in recent years we have seen an increase in the number of careless penalties issued during compliance checks into R&D claims, so this might indicate it's on their agenda and these penalties were imposed to allow HMRC potentially to utilise the 6-year window.

Example cases

Example 1: Bob

Bob runs a small workshop in Essex where he and a few employees repair and make bespoke metal garden objects.

Having never heard of R&D tax relief, Bob was surprised to hear a friend with a similar business had been claiming for years which reduced his annual Corporation Tax bill by around ￡10k each time.

Bob’s friend told him it was easy and to just tell his accountant that 50% of his annual staff expenditure was in relation to R&D.? So, in 2019 Bob did just that and, as his accountant wasn't very experienced in R&D, he agreed, and Bob got his promised tax reduction.

Bob carried on doing this until 2023 when he was told he now had to provide his accountant with some project details for the newly implemented "Additional Information Form", so he came up with a few of the more-tricky projects he had worked on that year and a breakdown of staff costs.

Unfortunately for Bob, this triggered a compliance check resulting in HMRC finding his R&D claim for 2023 was invalid.

This meant HMRC could now open an enquiry into Bob’s R&D claims for 2022, 2021 & 2020, and if his claims in those years were also found to be invalid, he would have to pay back all the tax benefit received, along with interest and potentially a penalty.

Example 2: Susan

Susan runs a web design agency and in 2015 was cold-called by an advisor who informed her that she should be claiming R&D tax relief.

The advisor then came in for a meeting and was very believable as they mentioned they have a 100% success rate and sit on a special R&D committee, so are one of the few firms with direct access to HMRC.

Susan still wasn't sure but as her company did work on some tricky web design work for clients, which often required something a bit different and the advisor told her this was exactly the type of work which qualified, Susan signed up and started making R&D claims.

Each year the advisor would speak to Susan about the projects her company had undertaken and would then produce a very long and impressive looking technical report.

The report wasn't entirely accurate as it contained lots of references to technologies they hadn't used and made things sound a lot more complicated than they really were. But as the advisor told Susan her previous claims had been approved by HMRC, and she quite liked not paying Corporation Tax, Susan continued making R&D claims.

In 2022 Susan's latest R&D claim, for the period ended March 2022, was subject to an HMRC compliance check and during a phone call with HMRC, Susan confirmed that the report which was submitted wasn't entirely accurate and some of the project details might be slightly misleading.

As a result, HMRC rejected Susan's R&D claim for 2022 and as Susan had been aware of the inaccuracies in the report, they also issued a careless penalty which meant an enquiry could now be opened into Susan's claims for 2021, 2020, 2019, 2018 & 2017.

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Guest article written by Paul Rosser

Paul Rosser has been in the R&D Tax Credit field since 2010 and is a Director at Research & Development Consulting Ltd.