The Chartered Institute of Taxation (CIOT) is warning that HMRC’s efforts to get tough on abuse of R&D tax relief are resulting in it rejecting legitimate claims by SMEs and stone-walling other genuine claimants with a bureaucratic system driving them to give up on their claims. The institute warns that this has led to a breakdown of goodwill and trust between HMRC and taxpayers and their agents.
In a letter to the director of Wealthy and Mid-Sized Business Compliance at HMRC, the CIOT says that the ‘volume compliance’ approach adopted by HMRC since the latter part of 2022 does not work well for R&D tax relief claims, due to the complex nature of the relief and the technical consideration required in ascertaining whether or not there has been a qualifying R&D project. This approach is based around frequent challenge and standardised letters with little or no opportunity for businesses and their advisers to explain the R&D activity they are engaged in. Whereas historically, conversations were an important mechanism through which R&D could be explained to HMRC, under the new approach there is no direct engagement between the compliance team and the claimant, either in person or virtually.
Ellen Milner, CIOT director of public policy, said: ‘Abuse of R&D relief is a substantial problem, but in its efforts to tackle it HMRC needs to be careful not to throw the baby out with the bath water.
‘We are receiving a large number of reports from our members about the difficulties being encountered by firms carrying out genuine research and development. Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so. Those businesses that do seek to challenge HMRC’s rejections seem to meet a brick wall, finding it very difficult to get a hearing for their case.
‘We are also concerned that HMRC is attempting to inappropriately apply penalties in cases where they consider no R&D has taken place,’ Milner said. ‘For example, we are aware of a number of cases where they have asserted that a failure to consult them in advance, instead relying on professional advice, constitutes carelessness. This is not in line with the established law around penalties, or with HMRC’s own guidance.’
The CIOT’s concerns are in line with those identified by a recent House of Lords committee report, Research and development tax relief and expenditure credit (January 2023). In particular, the CIOT shares the Lords’ concerns around the failure by HMRC to ensure that the requirements of HMRC’s charter are consistently met in relation to the conduct of R&D enquiries.
Similar concerns were expressed by tax disputes expert Jessica McLellan, partner at Wilson Wright. ‘I’m usually pragmatic around the necessity of HMRC enquiry activity in areas where there’s known abuse,’ she said. ‘However, we are seeing disproportionately invasive R&D enquiries from HMRC recently and contacts across the industry are reporting the same.
‘HMRC is asking for such extensive detail on all R&D projects within a claim that the time cost and professional fees outweigh the relief claimed. Yet withdrawing bona fide claims also places the client in a difficult position,’ McLellan said. ‘Given that this is a government relief intended to encourage genuine investment in creating UK advances, for companies with genuine R&D, HMRC’s enquiries are running counter to that policy aim and potentially, HMRC’s own litigation and settlement strategy’.
HMRC has engaged with the CIOT to discuss its concerns. ‘HMRC has told us that they are intending to publish a compliance action plan that sets out their approach and addresses some of the issues we have raised,’ Ellan Milner said. ‘We hope that this will lead to collaborative work with HMRC towards achieving a proportionate, fair and consistent treatment of taxpayers and agents.’
The Chartered Institute of Taxation (CIOT) is warning that HMRC’s efforts to get tough on abuse of R&D tax relief are resulting in it rejecting legitimate claims by SMEs and stone-walling other genuine claimants with a bureaucratic system driving them to give up on their claims. The institute warns that this has led to a breakdown of goodwill and trust between HMRC and taxpayers and their agents.
In a letter to the director of Wealthy and Mid-Sized Business Compliance at HMRC, the CIOT says that the ‘volume compliance’ approach adopted by HMRC since the latter part of 2022 does not work well for R&D tax relief claims, due to the complex nature of the relief and the technical consideration required in ascertaining whether or not there has been a qualifying R&D project. This approach is based around frequent challenge and standardised letters with little or no opportunity for businesses and their advisers to explain the R&D activity they are engaged in. Whereas historically, conversations were an important mechanism through which R&D could be explained to HMRC, under the new approach there is no direct engagement between the compliance team and the claimant, either in person or virtually.
Ellen Milner, CIOT director of public policy, said: ‘Abuse of R&D relief is a substantial problem, but in its efforts to tackle it HMRC needs to be careful not to throw the baby out with the bath water.
‘We are receiving a large number of reports from our members about the difficulties being encountered by firms carrying out genuine research and development. Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so. Those businesses that do seek to challenge HMRC’s rejections seem to meet a brick wall, finding it very difficult to get a hearing for their case.
‘We are also concerned that HMRC is attempting to inappropriately apply penalties in cases where they consider no R&D has taken place,’ Milner said. ‘For example, we are aware of a number of cases where they have asserted that a failure to consult them in advance, instead relying on professional advice, constitutes carelessness. This is not in line with the established law around penalties, or with HMRC’s own guidance.’
The CIOT’s concerns are in line with those identified by a recent House of Lords committee report, Research and development tax relief and expenditure credit (January 2023). In particular, the CIOT shares the Lords’ concerns around the failure by HMRC to ensure that the requirements of HMRC’s charter are consistently met in relation to the conduct of R&D enquiries.
Similar concerns were expressed by tax disputes expert Jessica McLellan, partner at Wilson Wright. ‘I’m usually pragmatic around the necessity of HMRC enquiry activity in areas where there’s known abuse,’ she said. ‘However, we are seeing disproportionately invasive R&D enquiries from HMRC recently and contacts across the industry are reporting the same.
‘HMRC is asking for such extensive detail on all R&D projects within a claim that the time cost and professional fees outweigh the relief claimed. Yet withdrawing bona fide claims also places the client in a difficult position,’ McLellan said. ‘Given that this is a government relief intended to encourage genuine investment in creating UK advances, for companies with genuine R&D, HMRC’s enquiries are running counter to that policy aim and potentially, HMRC’s own litigation and settlement strategy’.
HMRC has engaged with the CIOT to discuss its concerns. ‘HMRC has told us that they are intending to publish a compliance action plan that sets out their approach and addresses some of the issues we have raised,’ Ellan Milner said. ‘We hope that this will lead to collaborative work with HMRC towards achieving a proportionate, fair and consistent treatment of taxpayers and agents.’
