Navigating the complexities of R&D tax relief claims

The UK government incentivises businesses to invest in research and development (R&D) through tax relief schemes. However, the complexity of these schemes and recent concerns over fraudulent or erroneous claims mean that businesses need to exercise caution when submitting claims. HMRC has significantly ramped up its scrutiny of R&D tax relief claims, with £1.13 billion estimated in 'error and fraud' for the 2020/21 financial year alone. This has led to an increase in the number of compliance checks, with HMRC reviewing 20% of claims before payment in 2022/23, saving £250 million. The focus is clear: reclaim incorrectly awarded credits and prevent future errors.

HMRC has intensified its efforts to ensure that only legitimate R&D activities receive tax relief. A few hundred additional staff have been assigned to its R&D unit, resulting in more enquiries and proactive campaigns, such as 'nudge letters' that urge businesses to revisit their claims. These enquiries target both recent and historical claims, requiring businesses to demonstrate compliance with the complex rules governing R&D tax relief.

Given this climate of increased oversight, businesses must take preventative measures to ensure their claims are accurate and compliant. Being prepared for potential enquiries and knowing how to manage them effectively is essential to avoid financial penalties and reputational damage.

Common pitfalls in R&D claims

Errors in R&D claims are not uncommon. Misunderstandings of the scheme’s rules, poor documentation, and misclassifying activities or expenses are typical mistakes. Some of the most frequent issues include:

1. Claiming under the wrong scheme, such as using the SME regime when ineligible.
2. Incorrectly including subcontractor or subsidised costs under the SME regime.
3. Overstating staff costs, particularly including furloughed staff from the Coronavirus Job Retention Scheme (CJRS).
4. Claiming consumables that were not used up in the R&D process.
5. Insufficient documentation to support claims.
6. Focusing on commercial rather than scientific or technological advancements.
7. Failing to adequately explain technical details to HMRC.
8. Misinterpreting the rules, especially for foreign companies with UK subsidiaries.
9. Inadequate checks on claims before submission.
10. Submitting fraudulent claims.

If errors are identified in your R&D claim, whether by HMRC or through your own review, it is crucial to address them proactively. Voluntary disclosure to HMRC is often the best course of action and can significantly reduce penalties. The earlier you notify HMRC of any mistakes, the more favourable the outcome is likely to be.

Correcting R&D claims involves navigating a complex landscape of rules, behaviours, and penalties. UK tax law classifies taxpayer behaviour into three categories: innocent, careless, and deliberate (fraudulent), which correspond to time limits of four, six, and twenty years for HMRC to reclaim overpaid tax. Identifying which category applies and negotiating with HMRC requires expert advice, particularly to minimise penalties and back taxes.

In some cases, businesses may also need to negotiate "time to pay" agreements with HMRC to manage repayments without causing cash flow issues.

Conclusion: Be proactive, not reactive

Even if a business has already made an incorrect claim, there are ways to mitigate penalties. For instance, demonstrating that the company provided its advisors with accurate information and made reasonable efforts to verify the claim can lead to a reduction in penalties.

Given the complexity of R&D tax relief rules and the increased scrutiny from HMRC, obtaining expert advice is highly recommended. Tax Dispute Resolution (TDR) specialists can help businesses through the enquiry process, providing representation, technical expertise, and support to ensure compliance. Collaborating with R&D experts, they can review your claims, identify errors, and help you rectify them before HMRC intervenes.