Regardless of your area of tax expertise, it's likely that you've come across concerns about the misuse of the R&D tax credit system. Whether it be through claims that are pushing at the boundaries of the definition of R&D, or outright fraudulent endeavours, it is clear HMRC have become overwhelmed while trying to police the regime. As a result, they are now seeking to change their approach to how they tackle compliance within this space.
In July 2023, HMRC published its report entitled HMRC’s approach to research and development tax reliefs.The report set-out the compliance approach HMRC would take moving forward, in conjunction with the changes in legislation requiring more information to be provided with the claim. It now appears from recent correspondence, part of this change in approach will include the use of FA 1998 Sch 18 para 16.
Paragraph 16 permits an officer of HMRC to correct an obvious error, or anything else the officer has reason to believe is incorrect in the return, without undertaking a formal enquiry or indeed asking for any clarification from the taxpayer at all. Previously it has been used for little more than amending arithmetic errors such as transpositions, rather than wholesale removal of claims. HMRC have now acknowledged in a letter to the CIOT that they are trialling the use of this power to remove an R&D claim where they have reason to believe it is incorrect.
HMRC have not been clear on what information they will use to reach this decision, the level the decision will be made at, or if any discussion will be had with the company or their advisers before such a step is taken. Certainly, up until now, it would appear the decision is being made unilaterally, and that very little information is being provided on the reason why such a step has been taken. HMRC have, however, acknowledged that the letter advising that the claim has been removed has been lacking, and they will be updating these to include more information on why they believe the claim is incorrect.
HMRC’s own Corporate Intangibles Research and Development Manual states: ‘An open-minded approach should be adopted as to whether a project, or part of a project, is relevant R&D. It is important to gather all of the facts, and listen to the company’s representations before making a decision’ (CIRD80520). HMRC themselves acknowledge that: ‘The officers handling the company’s affairs will not hold themselves out to be scientific or technological experts.’ (CIRD80525). It is therefore difficult to reconcile such statements with the use of para 16 in this way.
Thankfully, the officer’s decision is not final, and the taxpayer can reinstate the claim by amending its tax return. This must be done within the normal window to amend the return, or within three months of the correction notice if the window has closed (although this would need to be done by rejecting the correction in writing). This will most likely trigger a formal enquiry in which the claim can be augmented with further information and correctly tested by the officer.
Regardless of your area of tax expertise, it's likely that you've come across concerns about the misuse of the R&D tax credit system. Whether it be through claims that are pushing at the boundaries of the definition of R&D, or outright fraudulent endeavours, it is clear HMRC have become overwhelmed while trying to police the regime. As a result, they are now seeking to change their approach to how they tackle compliance within this space.
In July 2023, HMRC published its report entitled HMRC’s approach to research and development tax reliefs.The report set-out the compliance approach HMRC would take moving forward, in conjunction with the changes in legislation requiring more information to be provided with the claim. It now appears from recent correspondence, part of this change in approach will include the use of FA 1998 Sch 18 para 16.
Paragraph 16 permits an officer of HMRC to correct an obvious error, or anything else the officer has reason to believe is incorrect in the return, without undertaking a formal enquiry or indeed asking for any clarification from the taxpayer at all. Previously it has been used for little more than amending arithmetic errors such as transpositions, rather than wholesale removal of claims. HMRC have now acknowledged in a letter to the CIOT that they are trialling the use of this power to remove an R&D claim where they have reason to believe it is incorrect.
HMRC have not been clear on what information they will use to reach this decision, the level the decision will be made at, or if any discussion will be had with the company or their advisers before such a step is taken. Certainly, up until now, it would appear the decision is being made unilaterally, and that very little information is being provided on the reason why such a step has been taken. HMRC have, however, acknowledged that the letter advising that the claim has been removed has been lacking, and they will be updating these to include more information on why they believe the claim is incorrect.
HMRC’s own Corporate Intangibles Research and Development Manual states: ‘An open-minded approach should be adopted as to whether a project, or part of a project, is relevant R&D. It is important to gather all of the facts, and listen to the company’s representations before making a decision’ (CIRD80520). HMRC themselves acknowledge that: ‘The officers handling the company’s affairs will not hold themselves out to be scientific or technological experts.’ (CIRD80525). It is therefore difficult to reconcile such statements with the use of para 16 in this way.
Thankfully, the officer’s decision is not final, and the taxpayer can reinstate the claim by amending its tax return. This must be done within the normal window to amend the return, or within three months of the correction notice if the window has closed (although this would need to be done by rejecting the correction in writing). This will most likely trigger a formal enquiry in which the claim can be augmented with further information and correctly tested by the officer.
