HMRC's Approach to R&D Claims is Heavily Criticised

Lee Sharpe, editor of the One Month In a Minute current awareness content for Bloomsbury Professional online tax subscribers, looks at the possible fall-out from HMRC’s approach to R&D claims.

Firstly, the ICAEW has advised that the new claim notification and additional information requirements that were supposed to apply to any R&D claims submitted (for any period) after 31 July 2023, have been postponed to 8 August 2023.

With an eye more to the long term, the CIOT warned at the beginning of July 2023 that HMRC’s efforts to “get tough” on perceived abuse of the regime were deterring genuine claims, and had led to “a breakdown of goodwill and trust between HMRC and taxpayers and their agents”.

Those are pretty strong words from the CIOT, let down only slightly by the omission of a reasonably important comma (I hope – unless perhaps it is being argued that HMRC’s malign influence is so great that it has succeeded in undermining the client/adviser relationship as well?).

The CIOT also asserts that HMRC is “stone-walling other genuine claimants with a bureaucratic system driving them to give up on their claims”. Now there is obviously a risk here that the CIOT might intend loud critique, but HMRC will instead hear ovation for a job well done.

The CIOT wrote to HMRC in early July 2023, to raise its concerns in detail. The letter is well worth review, if the reader is currently embroiled in a dispute with HMRC over R&D claims, and particularly if they are wondering, “is it me, or is HMRC being particularly difficult, across all claims, at the same time?”

But, dear Reader, see how many issues you can spot out of the points CIOT has raised on behalf of its members, as are summarised below, that are common to any dispute with HMRC you might have right now with HMRC – R&D or otherwise:

This is a high-volume compliance exercise by a team within “Individual and Small Business Compliance”, (“ISBC”), and one of HMRC’s “Campaigns and Projects” teams. If these are the same people who crank out the identikit “one-to-many letters” we occasionally report on, such as “You’re stillnot earning enough!” from June 2023’s MIM, then… no wonder we are where we are.
Lack of engagement or discussion with taxpayers – particularly their reasonably competent professional – and/or their agents: while a discussion with the claimant’s competent professional in the relevant technological field, etc., would normally be considered vital to an appreciation of the substance of a claim, the ISBC team is routinely telling taxpayers that direct contact is not necessary, or possible, even when this is requested.
Apparent lack of basic understanding of the R&D SME regime – it is perhaps telling, that HMRC has apparently tried to argue that CIRD80525 is not relevant to these enquiries undertaken by ISBC, on the basis that CIRD guidance is specifically for Specialist R&D units and not, therefore, applicable to enquiries opened by other HMRC departments such as ISBC …exclusively into R&D claims. Does the point need to be made that, if ISBC shouldn’t need to refer to the CIRD Manual, it might be because they shouldn’t actually be running enquiries into R&D? Or is it because they shouldn’t need to refer to the Manuals, if their primary objective be simply to refuse a claim?
HMRC’s failure to ensure its Charter obligations are consistently metin relation to the conduct of R&D enquiries by the ISBC team appears to be ongoing.
Poor level of technical competence, such as arguing that the claimant should provide proof that other competent professionals external to the business could nothave solved the identified uncertainties; or asserting that, if the advance were not shared more widely across the relevant industry, then it would not qualify as R&D for the purposes of a claim. Both are patently incorrect, and far short of what I think one might reasonably expect of a competent officer, well-versed in R&D claims.
HMRC’s carelessness when dealing with taxpayer matters, such as losing submissions or agent authorisations.
Failing to issue Closure Notices – leaving the taxpayer in limbo, unable formally to challenge HMRC’s refusal of the claim; “we understand that the time being taken to issue a closure notice may not be unique to enquiries in respect of R&D tax relief claims”.
Concern that HMRC is assuming that any case where the taxpayer simply gives up the claim due to HMRC’s adversarial attitude – despite there being valid R&D in that claim – is being seized on by HMRC as “proof” the claim was false, effectively self-fulfilling, by lending weight to HMRC’s (and the Government’s) misapprehension about the true scale and nature of the issues with R&D.
Penalties – “careless by default”, with HMRC’s questionable justification including the following nugget as an example offered by the CIOT:
- “You failed to adequately consult HMRC’s guidance at CIRD8000 [which is, of course, guidance primarily aimed at HM Inspector, in the hope that they read it, even if they supposedly shouldn’t need to];
- You relied upon advice given by a third party, [which contrasts nicely with HMRC’s guidance at CH81130, and Hanson v HMRC [2012] UKFTT 314, amongst others]; and
- You did not contact HMRC directly, before submitting your claim to R&D tax relief” [this is not a known stipulation for taking reasonable care, and the idea that HMRC would realistically take the time to provide such counsel, when it cannot even summon the energy to discuss an ongoing disagreement in its current R&D enquiries – well, you can almost taste the irony]

The CIOT also notes in its letter that HMRC’s approach has generated a significant number of formal complaints. I find myself wondering if HMRC’s performance metrics have descended to the simple ratio of:

Tax Yield: Complaints Made, or Upheld

My favourite part of CIOT’s letter is where it basically wonders if there would be any scenario in which ISBC might accept that an R&D claim were valid. Obvious candidates have been treated harshly: “Examples raised with us include the denial of R&D tax relief claims by businesses that have won the Queen’s Award for Innovation, and Oxford University spin out companies”. Kudos to HMRC for sticking to its guns: lesser mortals might have folded.

Elsewhere, the CIOT has reported that the Government has acknowledged “teething troubles” in relation to upscaling HMRC’s specialist team, but has in turn argued that technical support and specialist advice is readily available to the front line enquiry teams, within HMRC itself. And yet…

I have seen one or two of these letters from HMRC, which demand copious amounts of evidence to support a claim. They are clearly generic, with no focus on the specific taxpayer, or the company’s claim particulars. Given that much of the information requested appears to duplicate what was already included in the original claim, it is a pretty safe bet that HMRC’s letter was drafted based solely on the fact that the company had made an R&D claim in £x amount but without actually having reviewed the return or the R&D report invariably submitted therewith. (I feel that I may have read somewhere that HMRC is not supposed to demand information already in its possession..?)

When such information is supplied – again – HMRC then writes back to say “it is not enough: you need to provide more information” but without explaining what further information is required. Which I suspect means that the officer running the case may still not have bothered to review the claim particulars, but just hopes that the company will give up its claim, this then to be seized on as yet more evidence of supposedly widespread abuse of the R&D regime. Cue penalties for carelessness.

Fundamentally, we can see in this evidence that HMRC is less concerned about assessing and collecting only the right amount of tax, and more with the most amount of tax. Simply put: the greater the yield – and that is all. This is clearly a risk, with such a dogmatic, blinkered approach to enquiry by volume work.