How long is a piece of string?

That is a question RDS and plenty of others in the R&D industry have been asking themselves recently. As the clocks go back and the calendar turns over to November, the wait for HMRC replies to ongoing R&D enquiries grows ever longer.

HMRC have lauded their ‘task-based’ process that has allowed them to effectively adopt a volume approach for longstanding compliance issues within the R&D tax relief scheme. Whilst we fully agree that fraudulent claims need to be stamped out, the longer this extremely rigid, ‘guilty until proven innocent’ approach continues the more innocent bystanders are being penalised.

There would be much more empathy with HMRC’s approach if they showed a degree of consistency and common sense. When claims that have been worked on by competent professionals possessing PhD’s and have clear, quantifiable evidence that they have improved upon existing technology, are still not being allowing by HMRC it has left many not knowing where to turn. By HMRC doubling down with their blanket ‘Computer says No’ approach it has created an increasing level of frustration and an ever-widening chasm within the industry.

The BEIS guidelines are broad and ambiguous by nature due to them being applicable to a wide range of industries. The enquiry process would be much more palatable for all involved if, when clear and obvious evidence for R&D is documented in the report or correspondence, it is recognised by HMRC and duly processed. Where other claims are more nuanced and could be interpreted differently, companies would be happier to have a healthy debate about these cases if they know other ‘clear-cut’ claims are being allowed. When HMRC are following the same copy and paste questioning process regardless of the claim it has led to a complete erosion of trust in the process.

A further issue is the completely unbalanced expectations for communication once an enquiry has been opened. HMRC issue letters with a 1-month deadline and, whilst they have issued extensions when asked in the past, we have heard of some case handlers now refusing to give more than an extra 2-week extension for information. On the other side of the coin, we have enquiries that haven’t been responded to since June. When calling the ISBC Unit helpline for an update on one of these claims last week, I was told that this had not yet been assigned to anyone and no further information could be given on timelines due to HMRC’s task-based approach. This is a further example of the lack of accountability that has been encouraged at HMRC, with no named officers on enquiries and all questions and queries funneled through one generic email inbox and phone line there is no onus for anyone to keep to any timing deadlines. Whereas when the shoe is on the other foot, HMRC are quite happy to issue Schedule 36 notices; allowing them to charge an initial penalty of ￡300 followed by daily penalties of up to ￡60 a day for every day after the date the initial penalty is assessed until the information or documents are provided. As companies are charged more and more interest on any potential owed tax, it is a shame we cannot issue the same notice back to HMRC.

Whilst older enquiries are swallowed up by a faceless machine and “waiting to be assigned”, HMRC appear to be pushing on with opening more fresh enquiries (usually towards the end of the 12-month enquiry window to ‘protect’ their position) as well as plans for a merged R&D scheme in 2024. We await further detail on this at the Autumn Statement, but currently it does not seem sensible or viable for HMRC to be pushing through further change to a beleaguered tax relief scheme whilst so many enquiries and questions remain unresolved.

Whilst Ireland recently announced that they are increasing their Research and Development Tax Credit from 25% to 30%, we are faced with empty promises of making the UK a ‘science superpower’ whilst our R&D tax relief scheme is being made less rewarding for SME’s and more onerous to claim. We have heard first hand that some companies are moving their operations offshore and, based on the current state of play, who can blame them?

In a potential sign of some green shoots, HMRC released updated guidance on the 31st of October with regards to R&D tax relief; including a 14-step plan, more explicit details on what makes someone a competent professional and some real-life examples of R&D qualifying activity (including the much-maligned construction sector). We hope this is an indication that HMRC will be adjusting their current behaviour and process during enquiries, however, with the Autumn statement looming there is a strong indication that there will be a push to prioritise large companies through a merged scheme and further marginalise the SME community.