The Treasury Committee’s evidence session on the work of HMRC (24 April 2024) looked into various aspects of HMRC’s operations including the processing of R&D claims, with Committee member John Baron MP raising a number of questions around HMRC’s handling of claims.
Mr Baron summarised: ‘In HMRC’s effort to clamp down on fraud and error, there is a general view building, particularly coming from start-ups and small businesses, that it is putting economic growth and innovation at risk by rejecting legitimate claims for R&D tax relief...’
Jim Harra, HMRC First Permanent Secretary, accepted that there is a balance between making sure R&D tax relief achieves the objective of promoting innovation and investment, while at the same time protecting the Exchequer from error and fraud. Harra also noted the scale of the challenges faced by HMRC: ‘Our aim, obviously, is to enable legitimate claimants whose claims are accurate to get their R&D payment as quickly and as easily as possible, while preventing the non-compliant claims from going through. Most non-compliant claims have some relief due, just not the amount that is being claimed, but some — about one in seven claims in the small business scheme, in the mandatory random inquiry programme that we carried out — were not due any relief at all in our view.’
In terms of processing, Harra reported that there is no backlog of R&D claims at HMRC, having increased resources on R&D ‘about fivefold’ over the last two years.
But, while the new online claims process and additional information requirement both help HMRC risk-assess new claims, Harra noted that having the necessary expertise in the particular field presents a challenge: ‘My people are tax inspectors. They are not software engineers or rocket scientists and they meet a vast range of claims in areas in which they do not have expertise.’
Encouraging businesses to substantiate how their claims qualify for relief remains a focus for HMRC, with some of that detail being lost where agents ‘of variable quality’ become involved in the process, according to Harra, including those who ‘push their claimants into making highly speculative claims’.
Interestingly, Harra cites examples of R&D claims received from ‘rather surprising sectors’ including a number of care homes. ‘We have been making sure that they are educated about R&D,’ says Harra, ‘so that when they are approached by one of these agents and given a promise about what can be achieved, they think, – Oh, I’ve had something from the taxman that says, “Take care. Yours is not a sector that we would normally expect to qualify for this relief.”’
In terms of obtaining the necessary expertise to assess whether a claim relates to innovation in a particular sector, HMRC will approach the relevant government department to harness expertise, where that exists. HMRC are also to set up an external expert advisory panel to support the administration of R&D reliefs, where the relevant expertise is not available internally (as announced at Spring Budget 2024). Harra says: ‘We will be exploring how we can make best use of that panel so that claimants who are clearly working on innovation get their claims paid as fast as they can and get certainty that they can keep the money, whereas those where it is much more questionable get the right level of focus from our compliance team.’
The CIOT has provided a helpful summary of the Treasury Committee evidence session, including discussion on HMRC staff remote working arrangements, the department’s approach to tax repayment agents (perhaps covering old ground, given the F(No 2)A 2023 s 333 prohibition on the assignment of repayments to an agent), promoters of tax avoidance, and online sales reporting requirements for digital platforms.
Separately, the CIOT has issued an update on HMRC R&D compliance activity, following up on concerns it raised around HMRC’s ‘volume compliance’ approach to claims. The CIOT had met with HMRC in January 2024 to discuss those concerns and agree ways forward. Further discussions with HMRC in April covered the following points:
better triaging of enquiries and ‘significantly improved’ training of HMRC caseworkers is key to improving the handling of R&D cases, particularly for cases which need a more specialist approach (rather than volume compliance) - the CIOT notes that the training of HMRC caseworkers is ongoing;
HMRC are to publish a compliance action plan in due course which is expected to outline proposed actions to tackle error and fraud;
HMRC and the CIOT will consider how agents and taxpayers can be educated to raise the standard of R&D claims. HMRC is working on improving its guidance, and the CIOT is considering updating the Professional Conduct in Relation to Taxation to reflect the new compliance requirements for making R&D tax relief claims; and
HMRC expect to launch a dedicated R&D disclosure facility by the end of June 2024, to encourage voluntary R&D claims disclosures by taxpayers.
The Treasury Committee’s evidence session on the work of HMRC (24 April 2024) looked into various aspects of HMRC’s operations including the processing of R&D claims, with Committee member John Baron MP raising a number of questions around HMRC’s handling of claims.
Mr Baron summarised: ‘In HMRC’s effort to clamp down on fraud and error, there is a general view building, particularly coming from start-ups and small businesses, that it is putting economic growth and innovation at risk by rejecting legitimate claims for R&D tax relief...’
Jim Harra, HMRC First Permanent Secretary, accepted that there is a balance between making sure R&D tax relief achieves the objective of promoting innovation and investment, while at the same time protecting the Exchequer from error and fraud. Harra also noted the scale of the challenges faced by HMRC: ‘Our aim, obviously, is to enable legitimate claimants whose claims are accurate to get their R&D payment as quickly and as easily as possible, while preventing the non-compliant claims from going through. Most non-compliant claims have some relief due, just not the amount that is being claimed, but some — about one in seven claims in the small business scheme, in the mandatory random inquiry programme that we carried out — were not due any relief at all in our view.’
In terms of processing, Harra reported that there is no backlog of R&D claims at HMRC, having increased resources on R&D ‘about fivefold’ over the last two years.
But, while the new online claims process and additional information requirement both help HMRC risk-assess new claims, Harra noted that having the necessary expertise in the particular field presents a challenge: ‘My people are tax inspectors. They are not software engineers or rocket scientists and they meet a vast range of claims in areas in which they do not have expertise.’
Encouraging businesses to substantiate how their claims qualify for relief remains a focus for HMRC, with some of that detail being lost where agents ‘of variable quality’ become involved in the process, according to Harra, including those who ‘push their claimants into making highly speculative claims’.
Interestingly, Harra cites examples of R&D claims received from ‘rather surprising sectors’ including a number of care homes. ‘We have been making sure that they are educated about R&D,’ says Harra, ‘so that when they are approached by one of these agents and given a promise about what can be achieved, they think, – Oh, I’ve had something from the taxman that says, “Take care. Yours is not a sector that we would normally expect to qualify for this relief.”’
In terms of obtaining the necessary expertise to assess whether a claim relates to innovation in a particular sector, HMRC will approach the relevant government department to harness expertise, where that exists. HMRC are also to set up an external expert advisory panel to support the administration of R&D reliefs, where the relevant expertise is not available internally (as announced at Spring Budget 2024). Harra says: ‘We will be exploring how we can make best use of that panel so that claimants who are clearly working on innovation get their claims paid as fast as they can and get certainty that they can keep the money, whereas those where it is much more questionable get the right level of focus from our compliance team.’
The CIOT has provided a helpful summary of the Treasury Committee evidence session, including discussion on HMRC staff remote working arrangements, the department’s approach to tax repayment agents (perhaps covering old ground, given the F(No 2)A 2023 s 333 prohibition on the assignment of repayments to an agent), promoters of tax avoidance, and online sales reporting requirements for digital platforms.
Separately, the CIOT has issued an update on HMRC R&D compliance activity, following up on concerns it raised around HMRC’s ‘volume compliance’ approach to claims. The CIOT had met with HMRC in January 2024 to discuss those concerns and agree ways forward. Further discussions with HMRC in April covered the following points:
better triaging of enquiries and ‘significantly improved’ training of HMRC caseworkers is key to improving the handling of R&D cases, particularly for cases which need a more specialist approach (rather than volume compliance) - the CIOT notes that the training of HMRC caseworkers is ongoing;
HMRC are to publish a compliance action plan in due course which is expected to outline proposed actions to tackle error and fraud;
HMRC and the CIOT will consider how agents and taxpayers can be educated to raise the standard of R&D claims. HMRC is working on improving its guidance, and the CIOT is considering updating the Professional Conduct in Relation to Taxation to reflect the new compliance requirements for making R&D tax relief claims; and
HMRC expect to launch a dedicated R&D disclosure facility by the end of June 2024, to encourage voluntary R&D claims disclosures by taxpayers.
