It is clear from recent updates from HMRC, as well as the recently announced changes to UK R&D tax relief rules, that R&D claims are coming under increasing scrutiny from HMRC. R&D tax relief is a key part of the Government’s Strategy to encourage private sector investment in R&D, however it is seen as a high risk area by HMRC meaning they will have in place a robust operational strategy to identify, and effectively deal with, risks associated with incorrect claims.
If you currently claim, or plan to claim R&D relief, then it is now more important than ever to ensure that you effectively manage the processes associated with preparing your claim and that you are in a position to deal with any post claim questions from HMRC.
As part of HMRC’s renewed focus on R&D it has invested in additional specialist resources that will be solely focussed on checking the accuracy of R&D relief claims. It is expected that HMRC will adopt a segmented approach to addressing the risks associated with R&D tax relief; with a focus on targeting as large a proportion of R&D claimants as efficiently as possible. This means that in practice, we can expect to see an increase in ‘nudge’ letters, letters issued to large populations of claimants who are deemed to be higher risk, as well as an increased likelihood of claims being checked after they have been submitted.
It is therefore vital that businesses are able to readily demonstrate the accuracy of their claims in the event of an enquiry being opened by HMRC. This includes giving appropriate attention in real-time to matters such as:
- Evidence that systems and processes relevant to the R&D tax relief claims are documented and are robust. (How is information relevant to the claims captured, how is qualifying spend identified, what real time testing/controls are in place).
- Documenting the process of preparing a claim and applying that process consistently. (How is information extracted from systems to arrive at claim numbers, and how is this process evidenced? Who has responsibility and how do you ensure the appropriate amount of input from design and tax experts throughout the process?)
- Ensuring the claim is strongly evidenced and complies with the relevant legislative requirements: (What supporting documentation is prepared? Can you provide a full explanation of how the claim was calculated, provide contemporaneous evidence of the process, and details of any advice taken?)
Building a strong claim process that ensures you are taking the necessary steps in real-time and retaining supporting evidence, will ensure any post-claim HMRC questions can be more effectively dealt with. Failure to do so will risk a longer, more protracted, enquiry and will increase the likelihood of HMRC challenging aspects of the claim.
If HMRC do ultimately decide your claim is incorrect then you may also be liable to penalties in addition to any tax liability. To minimise the risk of penalties being charged you need to demonstrate you have taken reasonable care in preparing your claim. In this respect it is not sufficient to simply rely on the fact that you consulted an advisor, or that an advisor submitted the claim on your behalf. The claimant is ultimately responsible for the claim and so will need to assure themselves of the quality of the advice being provided and be satisfied that any advisor is operating with a full understanding of the facts specific to your business.
PwC has a range of highly experienced specialists who can help you with all aspects of your R&D claim. We’re well placed to help you:
(i) assure the Systems and Processes you use to underpin your claim;
(ii) prepare robust claims, with appropriate supporting documentation; and
(iii) advise you in the event that you receive a letter from HMRC about your claim.