R&D Tax claims and reasons that trigger an enquiry

25 June 2022

HMRC is opening an increasing number of enquiries into R&D claims to ensure that tax relief is available only for those businesses undertaking genuine R&D activities.

advice : Tax

The R&D tax reliefs, including the R&D Tax Credits, were introduced as the government support schemes to encourage and support companies that are investing in Research & Development. The R&D tax credits are an extremely valuable support for loss-making companies as it allows companies to claim a tax credit worth up to 14.5% of the R&D loss. 

However, this scheme became a target of frequent fraud and abuse. HMRC has identified and prevented a number of fraudulent claims, worth over £300m in total. Currently, HMRC is opening an increasing number of enquiries into R&D claims to ensure that R&D tax relief is available only for those businesses undertaking genuine R&D activities

In most R&D tax credit claims, HMRC either pays the payable tax credit or contacts the claimant within 28 days. If HMRC feels that the claim is incorrect, it will open an enquire for 60 days since receiving the claim. These businesses are then required to provide a significant level of information that supports their claims.

In this blog, we are looking at a few of the most common reasons why claims can lead to an HMRC enquiry and how to reduce those risks. The big sign of warning is when a claim is significantly out of line in comparison with other businesses in a similar industry. The most common errors when claiming R&D tax credits are listed below. 

Claims made under the wrong scheme

This often happens when the claiming company is private equity-backed and SMEs status is often more complex. In these cases, companies often fail to recognise that they are not SMEs, SMEs fail to claim under a large company status or Payable tax credits claims made for expenditure that applies for a large company scheme. 

Claims for subcontractors and subsidised costs

Expenditure can’t be incurred by the company in carrying on activities which are contracted outside the company. Whilst there have been some changes in the past regarding decisions on subcontracting, now the guidance focuses on the contractual relationships between the parties. This means that if the company is engaged contractually to deliver the product/service, then HMRC will view it as subcontracting.

Claims for excessive staff costs

These claims also include staff costs that have been on the furlough scheme during the pandemic, such as salary costs. Special rules apply to annual or sick leave, and staff on flexible furlough.

 Certain consumables incorrect inclusion 

Claims can also be reviewed and denied if they include consumables that are not used up or transformed in the R&D. In some cases, all consumables, that were bought, will be used up (such as machines or buildings). However, that is rarely the case. 

Claims of already available alternatives in the market

Claims may also not be eligible if the answer to the technological problem was readily available. 

Claims lacking explanation or documentary evidence

HMRC needs to understand the substance of all R&D claims and see if technology is being sought in the market. Understandable, they are not experts in all technological areas. Therefore, it is important to provide a clear and detailed explanation. 

An enquiry could be opened if there is not enough documentation, providing evidence for the claim. HMRC provides a list of those supportive documents that could help businesses to qualify for their claims. 

Misunderstanding the UK rules

Many countries have R&D credits, but the rules are slightly different from country to country. Errors often occur due to companies operating in different countries and not fully understanding the UK rules or providing the right documentation.

How can Finerva help

The R&D tax relief scheme can be very complex. We have long-lasting experience and a dedicated team of R&D tax credit specialists who can guide you through the process and prepare a detailed R&D Report to submit to HMRC. Get in touch with our team to discuss specific questions regarding your business claim.

The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.