R&D tax relief crackdown deterring genuine claims, Institute warns
The Chartered Institute of Taxation (CIOT) is warning that HMRC’s efforts to get tough on abuse of research and development (R&D) tax relief are resulting in them rejecting legitimate claims and stone-walling other genuine claimants with a bureaucratic system driving them to give up on their claims.
CIOT has shared with HMRC its members’ concerns around how HMRC are conducting R&D enquiries into claims by small and medium sized enterprises (SMEs). It is warning that this has led to “a breakdown of goodwill and trust between HMRC and taxpayers and their agents”.
In a letter1 to the Director of Wealthy and Mid-Sized Business Compliance at HMRC, CIOT sets outs its view 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.
The volume compliance 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 problem2, but in their efforts to tackle it HMRC need 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 are attempting to inappropriately apply penalties in cases where they consider no R&D has taken place. 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 result of this inflexible, confrontational approach is a breakdown of goodwill and trust between HMRC and taxpayers and their agents and a lack of faith in the R&D tax relief regime being able to deliver for SMEs. The current approach is discouraging legitimate claims from SMEs, which is undermining the policy intention of encouraging R&D.”
The concerns raised by the CIOT are in line with those identified by a recent House of Lords committee report3. 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.
Ellen Milner continued:
“We are keen to work with HMRC to improve compliance processes so that there is less of a collateral impact on genuine R&D claims, and the compliance processes support the policy objective of encouraging R&D.
“We, and our members, want bad R&D claims rooted out, but as it stands, it seems that HMRC do not have the systems in place to differentiate good from bad. Too many genuine claimants are embroiled in a rigid and uncompromising compliance process in order to defend their R&D tax relief claim, and are reconsidering using the scheme altogether as the costs of enquiry outweigh the benefits of claiming the relief.
“We are pleased that HMRC have recently engaged with us to discuss our concerns. HMRC have 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. We hope that this will lead to collaborative work with HMRC towards achieving a proportionate, fair and consistent treatment of taxpayers and agents.”
