By victoria Taylor

Innovation is a crucial part of the UK economy, and the UK government recognises this, therefore, provides lucrative incentives to businesses seeking advancement in science or technology. Innovation involves lots of risk-taking and costly experiments, and government reward these businesses with R&D tax relief or cash credits on qualifying R&D expenditure. In addition, R&D tax relief schemes are valuable funding available for innovative companies in all sectors.

In the past few years, the number of R&D tax relief claims have largely increased, and with that, HMRC tax credits enquiries have seen a significant increase. In addition, the profitable R&D tax relief scheme attracts most businesses, resulting in abuse of R&D claims to control misuse of R&D schemes and check the faulty claims; HMRC had to launch more tax credits enquiries.

According to our research, most businesses do not claim because they are either unsure about their project’s eligibility for the claim or are concerned about the perceived risk of HMRC tax credits enquiry. This blog will provide you with the reasons why you claim you can be subjected to an enquiry and how can you avoid it.

Why your company is subjected to the HMRC tax credits enquiry?

Through our experiences of resolving HMRC tax credits enquiry, we have identified a few common reasons why HMRC launched enquiries for the claims. Following is the list of possible reasons why you may face an enquiry.

• Lack of Supporting Documents

HMRC requires you to provide comprehensive information about how your project qualifies for the R&D tax relief claim. Therefore, you need to address the following questions in detail in your technical narrative, so HMRC finds enough explanation about your project, leaving no need for an enquiry.

  1. What scientific or technological advancement are you trying to seek?
  2. How is your project seeking advancement in science and technology?
  3. What are the scientific or technological uncertainties you faced during your project?
  4. Why the solution you are seeking was not readily deducible by professionals?

If the advancement you have achieved or are trying to achieve is not adequately explained in your R&D report. In that case, HMRC will consider launching an enquiry to make sure your company qualifies.

• Including the majority of staff in the R&D project

If you have listed all of your staff as the employees directly involved in the research and development project, this might result in an HMRC enquiry. If you claim that most employees are doing R&D projects, then it is better to provide details in your R&D report to clarify how they are involved and avoid any risk of tax credits enquiry.

• Incorrect calculations of qualifying R&D expenditure

Using the incorrect method of calculating the qualifying R&D expenditure might result in an enquiry by HMRC and might require correction and resubmission of the claim with the precise computations. Therefore, it is advised to consult R&D tax relief experts to ensure all your calculations are done according to the HMRC guidelines.

• Erroneous Tax Returns

Filing tax returns and the R&D claim process are often complex, and it is likely to make a mistake in it, and it can make you go through an enquiry for the claim. Therefore it is better to rely on an experienced and competent tax consultant who can file the claim for you.

• Complex contractual agreements

If your company has some complex contractual agreements, then HMRC might need to enquire from your company for further clarification regarding the agreement.

• Listed ‘directors’ as ‘sub-contractors’

Listing directors as subcontractors is a common error most businesses make in their claims. According to the HMRC guidelines, it is not allowed to do so and can cause a tax credits enquiry.

The HMRC is likely to conduct an R&D tax credits enquiry of your claim to assess if it meets the qualifying conditions thoroughly. Also, the HMRC conducts an enquiry to ensure that your claim falls within the preconditions: such as if your claim has been filed with a lack of documentation; the R&D cost claimed to exceed the amount permissible for a claim; the R&D tasks mentioned in the claim not coinciding with the actual nature of task conducted by your company for the R&D project etc. The HMRC, therefore, makes an R&D tax credits enquiry to analyse and understand how you fulfil the prerequisites of the R&D tax relief claim.

It is safe to consult R&D tax relief specialists who have experience making robust claims and adeptly dealing with HMRC enquiries. If you are claiming for the first time or are subject to a tax credits enquiry, contact our R&D experts, and they will take care of your claim.










© 2022 Square Finance. All Rights Reserved.