Last year, we discussed the HMRC stepping up its enforcement efforts to clamp down on R&D tax avoidance, including enquiry activity, targeting fraudulent and non-compliant claims. And that is exactly what they did – as it’s believed that the value of R&D claim currently under enquiry is equivalent to around 20% of the total claims made in 2022/23.

With such high results, this increased activity leads HMRC to ponder that actual levels of error or fraud may be 3-4 times higher than previously predicted. For 2022/23, for example, they now calculate that 13.3% of the value of all claims made may be down to error or fraud (with a 60/40 split, based on earlier periods).

Nobody would contend the principle, nor importance, of rooting out both. However, understandably, backed by this data, HMRC’s approach to these enquiries seem to start with suspicion, seek rectification and require little in the way of explanation or technical understanding. While this self-fulfilling change of approach is not entirely reasonable for genuine R&D claimants, there must be a reason for this strong stance and execution.

In the recent HMRC performance in 2022-23 report, the House of Commons Committee of Public Accountant shared HMRC’s response to suggestions, and that they may ‘lack the necessary expertise and training’ to handle technical R&D disputes. The response was one of acceptance, that they do not have many ‘engineering experts’, but that ‘for higher-level disputes it can bring in expertise externally or from other parts of government’.

This was not wholly consistent with the Government Science Capability Update paper (released a few weeks earlier), that quoted as a key finding as ‘…all departments reported challenges around attracting and retaining key science and engineering skills and experience.’

So…HMRC needs more technical experts to ensure competence in handling complex disputes, but can source those in wider government…but they aren’t there in wider government either? Thus, on the assumption that R&D enquiry levels are to continue to grow swiftly, where does this leave things? High volume, high speed enquiries – which never reach a ‘higher level’ in terms of technical challenge would seem likely. This could mean, for example, asking a few questions about the claimant, then denying the R&D claim in full without proper explanation, leaving the claimant facing a decision over a drawn-out and potentially costly appeal process. Whether those tactics amount to effective, or a bit rough & dirty (r&d!) …probably depends on which way you’re looking at it!

One thing is for sure, informed professional advice will be critical. If you need help in handling a HMRC dispute (R&D, r&d or anything else!), please get in touch with our experts. 

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