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Consultancy, Accountancy

Leading UK Tax professional bodies make strong criticisms of HMRCs current approach to R&D compliance checks.

An article in Tax Adviser magazine details a meeting between HMRC and representatives of the Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW). The full article can be found here.

On Enquiries into R&D claims the article states “The enquiries are being conducted in a confrontational manner and with a lack of willingness to engage with the taxpayer to discuss or understand the technical issues.”. It goes further to state “HMRC confirmed that there was a new team undertaking R&D enquiries and that they were being conducted with a ‘volume’, formulaic approach in order to increase the number of enquiries.” and that “Representatives said that perhaps a volume, process-driven compliance approach was not suitable for R&D, which required subjective analysis and engagement with the taxpayer, etc.”.

It is welcome that the professional bodies are speaking out on issues which are detrimentally impacting confidence in the UK SME R&D schemes and it is to be hoped that HMRC listens. My view is that HMRC are currently handling compliance checks incredibly badly. Incorrect judgments are being made, and clear and obvious errors are being made.

Claims are not being analysed correctly or fairly and HMRC are not even following their own manual on the conduct of enquiries where it states “During the course of an enquiry into an R&D claim, an officer from a specialist R&D Unit will normally make arrangements to discuss the claim with the company’s management and technical experts.”. In my experience these meetings are invaluable in making correct decisions at HMRC Enquiry. I personally cannot make a decision on an R&D claim on the basis of written information alone. I need to talk to those involved and test them to make a correct judgment on qualification. HMRC simply refuse to meet at present and fire off templated letters with little or no reference to the actual R&D involved.

HMRC are refusing to engage in any meaningful way with claimants. It further states “An open-minded approach should be adopted as to whether a project, or part of a project, is relevant R&D. It is important to gather all of the facts, and listen to the company’s representations before making a decision. “. It appears an approach is being taken where a computer algorithm identifies a claim as risky based on criteria like the SIC code and companies size, not the R&D case, and inexperienced inspectors have been given a set of negative interpretations of the subjective Guidelines to prove that judgement is correct irrespective of the evidence presented. The approach is not open minded and claimants are not listened to. This is simply wrong.

I always believed that if the Government wanted to cut the R&D schemes that they could cut the rates, which they have done, and change the Guidelines to being less inclusive and more limiting of claims through legislation, which they have not. The Guidelines are substantively the same as they were when first issued in 2004. It appears they have taken a third approach of simply reinterpreting the Guidelines in a way they did not in previous R&D claim enquiries to deny claims, and then blaming claimants for making clear and careless errors even when this new interpretation has not been published and started after the claim was filed! Such an approach is unfair and absurd. It remains to be seen if the Government will allow HMRC to continue to treat SMEs in such a fashion. As I said, hopefully, HMRC will listen. We are living the darkest hours for SME R&D claims, and they should not be casually destroyed.

Christopher Toms – Compliance Director RandDTax.