CIOT warns about new R&D tax relief rules

The Chartered Institute of Taxation (CIOT) warned in the recent Tolley publication that the new HMRC’s new R&D tax relief rules are resulting in rejections of legitimate SME claims. The institute also warns that newly imposed rules also led to a breakdown of goodwill and trust between HMRC, taxpayers and their agents. 

According to Tolley, the CIOT wrote a letter to the director of Wealthy and Mid-Sized Business Compliance at HMRC, stating that the ‘volume compliance’ approach adopted by HMRC in 2022 doesn’t work for R&D tax relief claims. The reason for this is the complexity of R&D tax relief and the technical consideration required to asses whether the specific project is qualifying or not. 

The new approach is based on frequent challenges and standardised letters with very limited opportunities for SMEs and their advisers to explain the R&D activity they are engaged in. Historically, conversations between the compliance team and the claimant were an important process through which R&D could be explained to HMRC. However, under the new rule, there is no direct engagement between the two parties. 

Ellen Milner, CIOT director of public policy, said: ‘Abuse of R&D relief is a substantial problem, but in its efforts to tackle it HMRC needs 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 is attempting to inappropriately apply penalties in cases where they consider no R&D has taken place,’ Milner said. ‘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 CIOT’s concerns are aligned with the recent House of Lords committee report, Research and development tax relief and expenditure credit (January 2023), especially around the failure by HMRC to ensure that the requirements of HMRC’s charter are consistently met concerning the conduct of R&D enquiries.

Similar concerns were expressed by several tax experts and agents since new R&D Tax credits rules were announced.