R&D Tax Credits: 10 tips to avoid an HMRC enquiry – part 1

In recent years it has become an open secret that R&D Tax Credit claims were virtually guaranteed to go through "on the nod".

This led to a certain type of R&D advisor emerging which began submitting claims for increasingly preposterous “R&D” projects, such as reconfiguring the placement of beds in a care home or swapping meat for vegetarian sausages on a pub menu.

With HMRC having been stung by criticism of the light-touch approach it had previously adopted in terms of reviewing claims, a clampdown on fraud and error in the R&D scheme was inevitable and it is now well-documented that an increasing number of R&D Tax Credit claims are being reviewed by HMRC for compliance.

For legitimate R&D claimants, an HMRC enquiry is also something to avoid if possible.

In most cases, an enquiry will require the R&D claimant to persuade technically unqualified HMRC staff that there was a technological advance being sought and this can take a few months to resolve, possibly including site visits and detailed responses to HMRC questions having to be prepared.

An R&D claim may have to be adjusted as a result of the enquiry and, if there are obvious errors in what is being claimed, there may be penalties on top.

For this reason, it makes sense to ensure that R&D claims are presented in such a way that minimises the risk of HMRC requesting more information, and which allows HMRC to accept the claim without enquiry.

Over two articles, I identify ten key areas where mistakes can be made - mistakes that can prove very costly for unwary applicants – but which, with a bit of forward planning, can significantly reduce the chances of an HMRC enquiry.

These are five of my top suggestions – the other five will appear in my next article.

1.???Always use a reputable specialist advisor to handle your R&D claim

The single best way to invite an HMRC investigation is to either self-prepare your own R&D Tax Credit claim or to use the services of an accountancy practice without a specialism in R&D Tax Credits.

Merely having the name of a reputable R&D advisor highlighted in the claim methodology section will demonstrate to HMRC that the claim has been prepared with a degree of knowledge and skill which the claimant itself would be highly unlikely to possess in-house.

An R&D advisory firm will typically produce hundreds of claims per year whereas a company preparing its own claim will only do one claim so HMRC may not be convinced that the claimant has a firm grasp on every detail of what is complex legislation.

Claimants should also be wary of the self-service and semi-automated R&D Tax Credit services that have sprung up in recent years. Such services are generally targeted at smaller claims – for which they can be a viable solution – however they have been designed to be overly simplistic so they should be treated with a degree of caution, particularly for larger claims.?

We are also seeing a growing number of R&D claims that have been prepared using boilerplate text that is repeated verbatim by the same advisor across many different claims.?Whilst these claim documents may include project descriptions, they do not define specific R&D projects, therefore they are so generic as to be almost meaningless.

If an R&D advisor sends you a form to fill in or directs you to an online portal where you upload your own project descriptions then this is a clear danger signal and such advisors should be avoided.

Choosing the right advisor is particularly important if you are in a sector which is not traditionally seen as ground-breaking in terms of R&D, such as food production or construction, so in these circumstances it is important to use a firm with specific expertise in preparing claims for your sector.

2.???Provide HMRC with a robust technical narrative

The requirement to submit a detailed technical description with an R&D claim should be obvious however many claimants either neglect this entirely or produce vague summaries of supposed R&D projects they have undertaken.

This is a very high-risk strategy as claimants who submit a poor narrative with weak justification for qualifying R&D have a higher risk rating within HMRC and this is more likely to trigger an enquiry.

The fundamental basis of an R&D Tax Credit claim is the identification of specific R&D projects, along with the technical advances and uncertainties in their respective fields of technology (as identified by a Competent Professional in those fields).

The advances should be benchmarked against the current state of play in the relevant field of technology, and, for the uncertainties, it should be explained why they were not already solutions within the knowledge base of a competent technology professional (or readily deducible from that knowledge base).

There should not be any confusion between an R&D project (which is limited to the advances in science or technology) and a wider commercial project.

For first time R&D claimants, it is particularly important to show HMRC that you are on the right track by demonstrating in the narrative that you have clearly understood all the rules.

HMRC will often check a claimant’s website for consistency, for example whether a purported brand-new product development appears on the company’s website as a mature product that is already being sold.?This could demonstrate that the R&D stage has already come to an end.

3.???Don’t make your R&D claim a marketing document??

Many companies can't resist the urge to tell HMRC how great their company is, how their products are world-beating, their customer service fantastic and boast about how many business growth awards they have won.

However, it is strongly advisable to avoid the temptation to turn your written claim report into a marketing or PR document.?

The simple fact is that HMRC is only interested in the technical advance, the uncertainty, and how you will resolve it.

By majoring on the marketing achievements of the business, claimants risk clouding the R&D aspects and making it difficult for an HMRC inspector to get to the bottom of the R&D project qualification.

In general, claimants should avoid focusing on the commercial objectives of R&D projects and try and stick to the technical advances, challenges, and uncertainties.

4.???Remember that R&D claims are made annually

R&D projects should be properly described for each claim year, so it is important not to keep referring back to previous year's claims to justify that R&D has taken place.

Clear statements should be provided detailing the advances being sought in the actual claim year being submitted. For example, it is not adequate to say that “the company continues to seek the same technological advances as last year.”?

The particular advances need to be identified and specified in terms of the underlying technology for each claim period.

By not articulating this correctly, R&D claimants could alert HMRC to the possibility that the R&D activity was substantially winding down or may even have been completed during the previous year.

Always keep in mind that R&D begins when the work to resolve the scientific or technological uncertainty starts and it ends when that uncertainty is resolved or the work to resolve it ceases.

5.???Clearly state the methodology used to prepare the R&D claim

Make it easy for HMRC to understand how the R&D claim was put together by including a detailed claim methodology section in the report to be submitted to HMRC.

This will demonstrate credibility and give HMRC the confidence that the claim is robust.

In particular, HMRC is looking for details of the Competent Professionals who have made the judgement of what activities qualify as genuine R&D under the guidelines.

Many R&D claimants are unaware that the validity of qualifying R&D rests upon the opinion of a Competent Professional in the field of technology which is the focus of the claim. The methodology section should name and describe the Competent Professionals, focussing on any qualifications and hands-on experience they have as a practitioner in the relevant field.

HMRC would like to see confirmation that the R&D is properly qualified so if the claimant doesn’t employ any Competent Professionals, then they will need to explain how they have established that the technical advance is actually an advance.

It is also useful to describe the process of evaluating the projects, how the technical report was prepared and how you arrived at the costs.

Always reference the specific HMRC guidelines that you are using to prepare the claim and state the name of the R&D advisory firm you are working with, and the role and qualifications of the individual personnel employed by the advisor who worked on the claim.

In the next newsletter: my final five tips to avoid an HMRC enquiry…

Rufus Meakin is a long-standing business development expert for R&D Tax Credits and a firm believer in raising standards across the UK R&D claims industry.