Chartered Institute of Taxation letter to HMRC on the approach to R&D enquiries (and HMRC’s response)

Background

On 3 July 2023, the Chartered Institute of Taxation (CIOT) published a letter sent to HMRC outlining significant concerns regarding the management and handling by HMRC of enquiries into R&D tax relief claims. It is understood that a team within Individual and Small Business Compliance (ISCS) has been tasked to undertake more R&D enquiries, being one of HMRC’s Campaigns and Projects teams, and CIOT’s letter was focused on challenges being experienced through these enquiries.

We are familiar with this process and were delighted to see a professional body taking the opportunity to raise concerns openly and directly with HMRC.

Concerns raised

The letter set out in some detail a range of concerns and provided an overview of the experiences of accountancy practices, R&D tax relief consultancies and claimants. The CIOT letter recognised that the volume compliance approach currently being adopted by HMRC brings benefits, but, more importantly, is also preventing fast-paced change through non-collaborative HMRC approaches that are discouraging legitimate claims and increasing uncertainty in the market. This is directly leading to dis-incentivisation of R&D activities in the UK, a market that feels fraught with risk and an environment that, at present, is stymieing growth during a period in which the UK is already struggling economically.

The concerns raised by CIOT and their members were wide-ranging, including:

Examples of poor behaviour from HMRC including a lack of care, inaccuracies in application of the law, poor communication and errors.
Lack of engagement and collaboration with taxpayers.
Failure of HMRC to ensure the requirements of their Charter are met.
Failure to give claims due and appropriate consideration.

The full text of the letter can be found here: CIOT Letter

HMRC response

The much-anticipated response from HMRC was published on 29 August 2023, and highlighted the following:

HMRC’s expressed objective is twofold – to ensure processes for claiming R&D are not unduly burdensome for compliant claims and protect the public purse from unacceptable levels of error and fraud.
HMRC acknowledged that the examples provided by CIOT demonstrate that HMRC’s response in those cases has not met its professional standards and Charter commitments.
HMRC believes that 50% of claims are non-compliant, rising to 75% of all claims for amounts under £10k.
HMRC accepts that addressing this will require collective action across the tax profession, and recognises that recent reforms and operational action will impact compliant claimants.
Targeted compliance activity is being undertaken when “large volume risk is identified; for example, in trade sectors where we do not generally see successful claims for R&D, and among first-time claimants within those sectors”.
All teams within Customer Compliance at HMRC should be working to the HMRC Charter commitments.
Training is being rolled out to less experienced caseworkers to support them in determining whether a claim has validity or not, and to ensure the professional standards are being met.
Work is in train to review the CIRD manuals which provide guidance on R&D claims and to draft new guidelines to assist claimants, working with external bodies to see if guidance can be redesigned to support customer understanding.
HMRC has more than doubled the size of the specialist R&D teams and now has 191 FTE specialists working on this issue, compared to 93 in 2020-2021; these specialists are part of more than 500 compliance officials working on R&D across HMRC.

The full text of the response from HMRC can be found here: HMRC Response

Conclusion

The CIOT’s letter is an accurate representation of the challenges being experienced during R&D tax relief enquiries, and we have expressed similar concerns around small business compliance activity directly to HMRC, Treasury and the ICAEW (the professional body of which our Director is a member). We would encourage others to do the same based on their experiences. It is encouraging that HMRC recognise the challenges, and it is clear that steps are being taken to improve the experience during the enquiry process – we look forward to these improvements being embedded in standard practice and making a noticeable difference as soon as possible.

HMRC have specifically noted, and accurately in our opinion, that addressing the fraud and error in this space will take “collective action”. In our view, this means a more co-ordinated and integrated approach to R&D tax relief where the current problems associated to poor communication, poor legislation, poor guidance, fast-paced change and heightened compliance activity can be tackled by all interested parties through collaboration. And by that, we mean collaboration in all directions: HMRC, R&D agents, accountancy practices, claimant companies, professional bodies and industry forums. The end goal is clear – a regime that rewards genuine innovation and UK R&D activity, directing funds to those who will reinvest, grow and succeed, and making the UK a centre of excellence for R&D. The path, at present, is a little rocky, but we hope that HMRC’s response and commitments will pave the way for positive, collaborative change.