As the issues have mounted, the impact has spread across the industry, and we’ve heard many reports of SMEs deciding not to claim for qualifying work, because it’s not worth the hassle and expense of an enquiry. The knock-on effect is that smaller R&D practitioners are giving up, or being forced to give up, preparing claims. Some are looking at other ways to support clients, some are taking jobs with larger advisory firms, and others are leaving the industry entirely.
The Chartered Institute of Tax (CIOT) have no doubt been hearing as much about this from their members as we have! They recently sent a letter to HMRC which outlined several issues with the new approach. These issues included:
- HMRC are refusing to hold meetings with claimants, instead relying on standardised error-riddled correspondence,
- Caseworkers will frequent disregard a competent professional’s opinions and reject claims that are probably valid,
- SMEs are receiving penalties for submitting claims, despite genuinely believing their claim was valid, and co-operating fully with the enquiry process.
It’s no surprise that this approach is discouraging legitimate claims, and harming innovative SMEs. Ironically, HMRC’s current approach is undermining the intention of the tax relief scheme – to create new jobs and help SMEs grow.
Let’s delve deeper into these challenges and explore how you can adapt to this new approach and support your SME clients to continue to claim their much-needed R&D tax relief.
Help HMRC engage with claimants and their advisers
Because of the volume of enquiries, and pressures on caseworkers, communication primarily takes place through emails and letters. Unfortunately, this limits the opportunity for businesses and their advisors to explain the intricacies of their R&D activities.
With the heightened attention, we hope to see HMRC adopt a more collaborative approach, and encourage more open and productive discussions. If you do manage to arrange a direct conversation, it is important you and your client are prepared.
Your priority should be to ensure the competent professional is comfortable with speaking with HMRC to explain
- their own knowledge and experience which qualifies them to speak as the competent professional,
- what the industry baseline looks like and how they established this baseline,
- the technological advance which the company aimed to achieve,
- the limitations of the baseline knowledge and how it prevented them from making the advance,
- the work carried out to resolve uncertainties using existing knowledge, techniques, and skills – and how this work left some uncertainties unresolved.
Try to approach the discussion with the attitude that HMRC wants to “help” rather than “hinder.” This mindset is more likely to lead to positive outcomes and reduce conflict with the caseworker.
Help HMRC Value Professional Opinions
The recent experience of many advisers is that HMRC are disregarding the opinions of the competent professional. This is frustrating, but it’s not impossible to avoid. It seems to happen when the caseworker doesn’t understand the explanation of the R&D, its uncertainties, or the baseline.
From what we’ve seen, a lot of R&D technical reports are not written to allow a layperson to understand and easily see where R&D exists.
Try and look at it from the caseworker’s perspective. Imagine you knew nothing about the field your client is working in and had no prior knowledge of what was possible. Think about how someone could interpret what’s written, and how they might try to verify the information. For example, we’ve heard of caseworkers denying claims based on a quick Google Search – so make sure you search keywords from your report ahead of time, and that your explanation will put the results correctly into context.
These days, we know exactly what information HMRC need for each claim or project, from the new Additional Information Forms, and from their standard enquiry questions. That means you have a strong framework to use to lay out the baseline, advance and uncertainties in a way the caseworker can understand.
When you take this approach – keeping things clear and bringing the caseworker along with you – then in return they can give a fair evaluation of the claim. When they understand the R&D projects you’re presenting, it’s easier for them to value the opinion of the competent professional.
Help HMRC levy penalties fairly
If HMRC applies a penalty, understandably, you and your client may feel aggrieved, especially if you’ve co-operated fully, and if you have a technical disagreement over whether the project meets the definition of R&D.
It is possible to have the penalties dropped, but it is essential that communication remains non-confrontational. Try to keep calm, and respond specifically to the reason given for the penalty. For example, if it’s due to “a lack of reasonable care”, then write back to HMRC explaining all the steps taken by the client to be cautious and compliant. This might include consulting HMRC’s guidance and taking professional advice to help interpret it for their R&D activities. If you can maintain the professional, collaborative tone we talked about earlier, you’ll increase your chances of success.
Help your clients get the best results from their R&D claims.
We hope that pressure from the CIOT – along with the work done by the House of Lords last year, and the work underway by the National Audit Office – will serve as a catalyst for positive change in the handling of R&D claims and enquiries.
Professionals in the R&D industry have been clear at every stage and through every avenue when describing what’s not working! In the long term, we’ll likely see more changes to HMRC’s approach as they introduce the combined R&D scheme next year.
For now, the most important thing you can do is to face any enquiry with a positive, collaborative approach. There’s a lot you can do to protect the interests of your own clients. Don’t let your frustration with the bigger picture get in the way of getting the best outcome.