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How is the pressure on HMRC impacting R&D enquiries?

A headline in The Times, Saturday 20 May 2023 stated “Brace yourself for more HMRC chaos” and warned that new tax rules would mean more work for a tax office that is already struggling to cope with queries. This was raised in the context of personal tax affairs, rather than anything specifically around corporation tax or R&D tax relief issues, but it speaks to a system under strain.

We’re sure we don’t need to tell our accounting partners about the frustration of waiting for calls to be answered and a backlog of postal queries. This comes at the same time as HMRC announced that it was to close VAT registration helpline from 22 May, giving agents and taxpayers just five days’ warning that the service will end.

What is GovGrant’s experience of HMRC queries in recent months?

As with any business working with R&D tax relief claims, we have seen an increase in the number of HMRC enquiries and OTM compliance checks land with our clients. Of course, we stand by our claims and will manage the enquiry process free of charge for our clients. But it can still be a time-consuming and frustrating process for us and, to some extent our clients.

We have had HMRC enquiries that have been closed in our favour with no changes. This gives us the confidence that it is worth engaging with HMRC and making our case. We wish it didn’t feel so adversarial but sometimes it does feel like we’re having to fight the good fight on behalf of our clients.

Although we do also have clients who decide that they will withdraw some parts of their original claim, not because it wasn’t valid but because they don’t see the monetary value of the claim will justify the perceived aggravation.

This means that some businesses are discouraged from claiming the tax relief they are entitled to for the innovation in their business. It doesn’t prove anything about whether they wrongly or fraudulently claimed, just that they don’t trust the system to quickly and easily find in their favour.

What issues are our accounting partners reporting with R&D enquiries?

A consistent frustration is the inequality of dealing with HMRC, with clients being given short deadlines for their response, whilst HMRC is taking weeks if not months to respond.

There is an issue with inconsistency, where enquiries have moved from one inspector to another resulting in having to duplicate the information that needs to be provided and the consequent delays to the enquiry process. The question accountants are asking is whether this is due to the inexperience of new inspectors who are having to pass enquiries up to a more senior member of staff.

Of course, accountants well understand that clients are concerned about ‘going into battle’ with HMRC fearing it will have any wider implications for their businesses. But as a profession, there is a recognition that where there the claim is compliant it can be important to stand firm and defend an R&D claim on principle for the benefit of the wider scheme.

What is the R&D industry’s experience of dealing with HMRC?

At our recent round table event for R&D tax leaders, there was a degree of concern that HMRC is under pressure and just isn’t properly resourced for the scale of the task at hand. The feeling was that somewhere along the line initiatives to reduce fraudulent activities have simply been dropped.

Inspectors may not have had the time or experience to build knowledge of the R&D tax relief schemes. Enquiry letters may not even come from a named inspector, but instead from a central compliance team. Most advisors and their clients are struggling to enter into any sort of useful dialogue with HMRC on key issues. There is a call for HMRC to be more collaborative so that there is mutual understanding and learning.

There is a principle at stake here. Does the industry need to push back and fight the good fight for businesses small and large and challenge HMRC decisions where we feel they’ve got it wrong – both at operational level, but also at policy level?

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