R&D Claims | HMRC Investigations and Penalties
In our previous articles discussing the Research & Development (R&D) Tax Relief scheme and the process of Making a Claim for R&D Tax Relief, we explored the evolution and types of R&D tax relief schemes, as well as the criteria used by HMRC when processing a claim.
In this article, Hamraj Kang delves into the conduct of HMRC investigations into alleged tax avoidance and fraud by companies during the submission of their applications for the R&D Tax Relief Scheme. It explores the ensuing investigation process and potential penalties.
In light of a surge of applications for R&D tax relief applications, especially amid the COVID-19 Pandemic, HMRC has initiated reviews of accepted applications to determine whether relief was correctly granted.
HMRC can open investigations at random to check if a company still meets the criteria for R&D tax relief, to identify if any mistakes were made in the approval of an application, or if insufficient explanation has been provided by a company in respect of an enquiry made against them.
Ultimately, the goal of these investigations by HMRC is to uncover potential instances of tax avoidance, evasion, or fraud committed by those making seeking tax relief they are not rightfully entitled to, or for where they should have been aware of their ineligibility when applying for such relief.
Types of Tax Avoidance in R&D Schemes
There are many ways where a claim may be inaccurate without necessarily being classified as tax avoidance. This includes genuine mistakes or misunderstanding of the calculations or figures provided, as well as misinterpretations regarding how to quantify information within a claim.
If a transaction is linked primarily to arrangements made with the intention of accessing R&D tax relief that would not otherwise be accessible, then the transaction may be disregarded when calculating the extent of any R&D tax relief or payable credit.
Types of tax avoidance include:
- Elevating expenditure.
This involves a company asserting that it has spent more than it actually has on research and development, thereby claiming tax relief based on exaggerated expenditure.
In essence, this process involves an applicant and other involved participants engaging in a structure where a payer and a recipient conduct multiple transactions to boost cash flow, thereby exaggerating expenditure and obtaining increased tax relief or mitigating any losses incurred. - Increasing the amount of payable R&D tax credit that can be received.
There are caps to the amount of payable credit according to the company's surrender able losses, PAYE, and NIC position. If artificial arrangements are implemented to bypass these caps, it would be necessary to look at the possible operation of the specific anti-avoidance legislation. - Devices to manipulate the company’s SME status.
Large companies would prefer to fall under the SME company scheme due to its more generous deductions compared to their scheme, and the potential for a payable credit for loss-making companies.
Nudge Letters
Before conducting any enquiries, HMRC may issue what is known as a ‘nudge’ letter which is sent to an applicant. This letter is to encourage them to review their claim, ensuring that their application is accurate and free from potential errors.
Nudge letters are usually sent to applicants to ensure compliance with the R&D tax relief scheme without the need of HMRC to open an enquiry.
Receiving this letter does not mean that there is necessarily anything wrong with a claim that has been made. However, a company should ensure that all information provided is true and accurate.
Official Enquiry
An official enquiry opened by HMRC, also known as a compliance check, occurs when HMRC are unsure whether some or all the projects applied for by an applicant qualify for relief within the scheme. To satisfy a compliance check, HMRC will often ask for further documentation and information about a company’s development work in writing, via video conference or in person. Enquiries can last several months and result in the delay of R&D funding.
When requesting information, HMRC will send a letter and will expect a response within 30 days to their questions.
The structure of an enquiry and how quickly it is resolved is therefore very much dependent on the effectiveness of the answers given to HMRC. Accurate and succinct answers could help end an enquiry much more quickly than any attempt to cloud or muddy the waters with unclear and irrelevant answers.
Hiring legal assistance has the potential to significantly reduce both the duration and scope of investigations.
How can we support you?
The R&D tax relief scheme is not only extremely complicated but a constantly changing area of tax law. HMRC remains alert to its susceptibility to deliberate tax avoidance, with HMRC potentially undertaking investigations that may result in:
- reduction in the amount of any relief claimed,
- penalties imposed resulting from careless, negligent, or deliberately misleading applications,
- criminal proceedings.
The experts at KANGS are here to offer comprehensive guidance in relation to HMRC investigations arising from the R&D tax relief scheme. We are delighted to answer any questions you may have. If you ever find yourself under scrutiny by HMRC, it is crucial to seek immediate expert advice and support.
Should you require our assistance, please contact using the details below.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide an initial no obligation consultation from our offices in London, Birmingham, and Manchester. Alternatively, we provide initial consultations by telephone or video.
