A tale of two enquiries

Emily and Joseph have both built their own successful businesses, both their companies develop software which is then sold to their customers, both employ 8-10 highly skilled developers, and both turnover around ￡3million a year.

For the past few years Emily & Joseph have both made annual claims for R&D tax relief, using an advisor who their accountant recommended.

Then one day in early March, a brown envelope from HMRC arrived on both Emily and Josephs desks which contained a letter informing them that HMRC were opening a compliance check, aka an enquiry, into their latest R&D claim.

Both letters started in the same way, with a notification that a compliance check was being opened, a date by when HMRC requested a response and links to various online resources.

This section of the letter was slightly different in each letter though, as whilst Joseph was provided with the name of the HMRC case worker who would be handling his enquiry, on the letter Emily received it was just signed "R&D Tax Credits Compliance Team"

The differences didn't stop there, as the letter Emily received asked 12 generic questions, which seemed strange to Emily, as they had already been answered in the supporting documentation her advisor submitted when her claim was sent to HMRC. Where in Joseph's letter the questions were much more direct and referenced the supporting documentation his advisor had submitted, and asked relevant questions about various aspects of his claim.

Understandably Emily and Joseph were both very concerned, as not being used to HMRC looking into their tax affairs visions of being sent to prison flashed through their minds, but their advisors reassured them it was quite normal, nothing to worry about, and helped them both compose a suitable response to HMRC.

Then, after a 3 month wait the next brown envelope arrived.

As Joseph read the rather comprehensive response his case worker had composed which mentioned BEIS and all manner of official sounding legislation and how it might apply to his projects, he though to himself "I'm not entirely sure my case worker understands the technical aspects of these projects", so when at the end of the letter his case worker offer a video call to discuss the claim, Joseph thought this was probably a good idea, to ensure there were no misunderstandings.

Over in Emily's office things were not quite so straight forward, as the letter Emily had received was just another series of generic questions which seemed to ignore everything sent in reply to the first letter, but after speaking to her advisor and being informed this was standard HMRC procedure, Emily worked with her advisors to compose a response, which included an offer to have a call or meeting with HMRC to discuss the claim, to ensure there were no misunderstandings.

After a few weeks Joseph heard back from his case worker and a video call was scheduled, to include some of the developers who worked on the projects being claimed for. Meanwhile Emily hadn't heard anything back from HMRC.

During the video call the case worker seemed genuinely interested in the projects, asked lots of good questions and gave Joseph and his developers the opportunity to discuss their projects at length. Meanwhile Emily still hadn't heard back from HMRC.

A few weeks later, a third brown letter arrived, in Josephs case it was great news as his case worker had approved his claim in full, and whilst it had taken some time Joseph understood that HMRC need to do such checks, just to make sure everything is above board.

Sadly for Emily her letter was not such good news, as it contained a pre-decision that her claim was being rejected in it's entirety, due to some online searches undertaken by HMRC finding similar software already on the market, but with no specific details as to what it was they found and inviting counterarguments.

The offer of a meeting or call to discuss the claim wasn't mentioned, just that a reply should be provided within 3 weeks.

This caused Emily a lot of confusion and distress, as how could she possibly provide a valid counterargument when there were not enough details about the result of the online searches to know what to argue against?

Emily wondered, "As the R&D claim only contained one project which was in relation to a new software product her company had launched in 2020, but which was then widely copied, as their competition played catch up, if HMRC did a search now did they find details of one of her competitors products and this was the basis to reject the claim?"

Once again with her advisors assistance, Emily gave up her valuable time to write an elegant response to HMRC providing details of all of her competitors software, which copied what her company had released earlier, along with valid technical reasons why their software either wasn't as good, or why the claims made by her competitors in their online marketing weren't truthful, as their software couldn't reliably do what they claimed, where Emily's companies software could.

In the response Emily also mentioned that if HMRC could provide more specific details of the software their search results found, then a more focused counterargument would be provided and once again the offer of a call or meeting to discuss the claim was offered.

After another long 3 month wait, the 4th brown envelope from HMRC arrived, this time it was a closure notice with HMRC rejecting Emily's claim in full, although the reasons given for this decision were that HMRC felt Emily's company didn't do enough research at the start of the project to adequately establish the baseline technology, with no mention of the requested online search results, the counterargument put forward with regards to the previous pre-decision, or the offer of a meeting.

The letter also said that due to this outcome, Emily's company now owed HMRC ￡20,000 and another ￡1,000 in interest, although they could ask for someone else at HMRC to review the claim, for Alternate Dispute Resolution which is handled by someone impartial at HMRC, or they could take the case to a first tier tribunal.

As, at no stage during the enquiry had HMRC asked for details as to how much, or what type of research her company undertook at the start of the project to establish the baseline technology, this decision seemed very wrong and at this stage Emily felt like giving up, as what was the point of having someone else at HMRC review the case? Would it give a different outcome? And can someone who works for HMRC be impartial?

Emily decided that as the enquiry had already taken up a lot of her time, the best option would be to pay HMRC the money and never make an R&D claim ever again.

Meanwhile Joseph, very pleased with the outcome of his enquiry continued to make R&D claims, safe in the knowledge if he ever got another enquiry it would be handled fairly and resolved quickly.

Unfortunately the story you have just read is based on real events, with only minor details being changed to protect the company owners from identification.