Issues we see when responding to HMRC R&D enquiries
Posted: 24th April 2024
HMRC is continuing to shift gears when it comes to compliance measures. This means businesses are running into more issues than ever as they try to claim R&D tax credits. While HMRC R&D enquiries used to be something of an informal process, the past two years have seen significant changes. HMRC now takes a rigorous approach to R&D tax credits and investigates one in five businesses each year. With this in mind, it’s a good idea to take a proactive approach when responding to an HMRC R&D enquiry and learn more about the issues you can potentially run into. Here are a few areas we’re currently supporting clients with.
Enquiry response letters
Clients regularly need support with preparing response letters. All too often, a taxpayer can respond to an information request without thinking about potential risks or liabilities, which is why it’s helpful to consult a specialist for advice. In an ideal world, you might pick up the phone with us to talk through the first letter you received, which notifies you of any HMRC R&D enquiries.
But we know a lot will be running through your mind at that point, so that might not happen. We typically end up stepping in when the initial enquiry response hasn’t worked. Our input varies from helping clients prepare an appropriate response letter to HMRC, or reviewing a response that has already been drafted. This ensures you’re providing accurate information to HMRC on costs, project timelines and competent professionals.
HMRC meetings
If an R&D tax dispute does arise, HMRC meetings may be on the agenda, which can take place face-to-face, over the phone, or by video call. They serve as an effective means for HMRC to dig into the facts and figures of your business, and allow you to discuss how and why you’ve reached your conclusions.
When we prepare clients (and advisors) for meetings, we focus on:
- Talking through the agenda and discussing helpful examples
- Consider any schedules or documents that might be useful to present
- Arrange a confidential space (in person or virtual) for break-off discussions
- Learn more about your desired outcome, and how you can encourage HMRC to accept that outcome
- This allows you to resolve any points of disagreement in your HMRC R&D enquiry and potentially reach a settlement.
Second opinions
When clients are struggling to move forward in their HMRC tax disputes, they may seek a second opinion on the validity of a claim. And that’s where we come in.
With years of knowledge and experience behind us, our tax experts can examine your communications and position with HMRC, and make helpful suggestions on your next steps. This is designed to improve the outcome of your claim for R&D tax credits.
For example, we’ve worked with tax advisers who have reviewed taxpayers’ claims and decided that the claims are too weak to be defended. However, once we’ve stepped in, we’ve been able to argue that reasonable care has still been taken, so penalties shouldn’t be charged.
Penalty negotiations
We often come across clients who have been issued penalties by HMRC, without proper grounds for doing so. So if HMRC suggests you owe them a penalty and something doesn’t feel right about it, be sure to seek the advice of a specialist. They will be able to assess HMRC’s explanations, which could save you money while protecting you from an unfair outcome.
It’s also worth bearing in mind that it’s not uncommon for HMRC to fail to mention the suspension of penalties, so you’ll need to look out for this. Typically when a careless penalty has been agreed on and suspension conditions could be determined, these need not be R&D specific.
HMRC’s tax penalty regime is often based on taxpayer behaviour, and will therefore consider factors including:
- The timing of your tax payments
- The nature of the discrepancies
- Whether specialist advice has been sought before taking action
- How aware you are of the discrepancies in question
- Whether you have volunteered information or needed to be prompted by HMRC
ADR and tribunal support
These are two key areas that we support our clients with.
ADR (Alternative Dispute Resolution) is led by impartial HMRC mediation that assists both parties reach a solution outside of court, and can typically be used through most stages of an HMRC R&D enquiry. Meanwhile, tax tribunals focus on hearing the appeals concerning the decisions of HMRC. These are independent from the government, but can only take place once you’ve made your initial appeal to HMRC.
While it would be preferable to resolve an enquiry directly with HMRC, we understand this doesn’t always happen. This is why we work alongside clients who need advice during the alternative dispute resolution process, as well as those who need to make preparations for tribunals.
These are examples of strategies that can be used beyond the usual HMRC R&D enquiry process, so they’re tactics to bear in mind as you work towards resolution.
Overcoming obstacles
Whether you’re at the beginning of a tax dispute or negotiating penalties, it’s important to be aware of the common issues that could trip you up along the way. Resolving HMRC R&D enquiries isn’t as straightforward as it used to be, so you should be aware of the bigger picture and keep all your options open for resolution.
If you’re currently dealing with any of the issues we’ve outlined above, be sure to reach out. We reduce the burden of your R&D tax disputes by taking the time to listen and understand your situation and guide you every step of the way towards resolution. Contact us here for a confidential discussion, or send an email to Sarah (sarah@nhd-tax.co.uk) or Nick (nick@nhd-tax.co.uk).