How to ensure your R&D tax relief claim isn’t flagged for review by HMRC

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As is the unfortunate way with any tax reclamation scheme, some nefarious businesses and consultants find ways of submitting fraudulent or disingenuous R&D tax relief claims. Of course, honest mistakes can also be made on tax relief submissions. Concern has been growing about the number of claims being flagged by HMRC for further investigation, with HMRC estimating levels of fraud of over 4.5% in the FY 21-22. The SME scheme has seen greater levels of fraud at over 7%, with just 1.1% for the large business RDEC scheme.

The combined impact of these fraudulent claims is pretty extensive, and is thought to be in the region of £460m in the FY 2021-22.

These growing numbers were enough for HMRC to introduce widespread measures to tackle dishonest claims, as we have identified here, including changes such as those to overseas subcontracting as reported in our blog.

What is the penalty for non-compliance?

Penalties for non-compliance and claims that are not ‘robust’ enough for HMRC’s liking are justifiably severe. In the most serious cases, this can be up to 100% of the tax lost.

However, HMRC does take the company’s conduct and levels of cooperation into account, so if you receive notice of an investigation into your claim and are communicative and helpful in attempting to rectify any issues, there is a good chance any penalties levied will be lessened to suit.

How will I know if HMRC investigates my claim?

HMRC will open an enquiry, meaning they intend to investigate the detail and validity behind your claim further to establish its merits. This process can be quite protracted and could take many weeks or months to conclude, depending upon how erroneous the information was and the complexity of the case you submitted.

It is at this stage HMRC will attribute specialist R&D investigators to review the claim, who will in turn liaise with experts in the respective field to ascertain the voracity of the claim.

It is key to note that HMRC enquiries can be opened even after a claim has been processed; your claim isn’t ‘closed’ just because you have received a successful result or claim pay out.

What if the error is due to an honest mistake?

HMRC can choose to apply a penalty of ‘nil’ if it can be shown that a mistake was of a genuine and honest nature, and proper care and attention have been applied to the rest of the submission. As above, every business and R&D submission is unique, forcing HMRC to address each submission on a case-by-case basis.

Your conduct and level of cooperation – as identified above – are critical; your level of sincerity and responsiveness in dealing with the HMRC team will be reflected in the severity of the penalty you receive.

How to avoid penalties on R&C tax relief claims

It goes without saying that it pays to exercise extreme care and diligence when composing your R&D claim. The lost time and money that can result from having claims investigated, or rejected entirely with potential penalties, can be extremely damaging to even large established companies.

Your claim needs to be robust with as much evidence to back up your claim as possible. And to show that the methodology behind your project is sound and bona fide in nature.

It is worth remembering that HMRC does not actively want to withhold payments for genuine claims, far from it. However, they are actively on the lookout to ensure that your claim is substantive enough to warrant payment.

The consulting team at Yuzu Group speak HMRC’s language and we know what it wants to see in your claim. Our team can sniff out disingenuous claims, so please only enquire if you have a claim that can be backed up with a substantial narrative, justification and evidence to provide to HMRC and that can stand up to their high level of scrutiny.

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