Overcoming an R&D Tax Compliance Check: Myriad's Success Story

Navigating an HMRC R&D tax compliance check can be daunting for many businesses. However, it doesn’t have to spell disaster. Myriad has successfully overcome multiple R&D tax credit enquiries from HMRC, demonstrating that a well-prepared response can effectively address concerns and ensure compliance.

Here’s how we addressed our latest HMRC enquiry and helped answer HMRC's questions, ultimately leading to a positive outcome for our client.

Understanding the Compliance Check

HMRC's compliance checks are a standard and usually randomised part of its process to ensure that claims made for R&D tax relief are accurate and justified. In this case, a robust and detailed claim report was submitted alongside the Additional Information Form (AIF), but HMRC still opened an enquiry asking for the information to be resubmitted.

In our recent case, an apparently standard list of questions was asked, of which headings included:

• What the scientific or technological advance is
• What the scientific or technological uncertainties involved in the project were
• How and when the uncertainties were overcome
• Why the knowledge being sought was not readily deducible by a competent professional

HMRC also asked for the details of the costs claimed and the methodologies used to reach these costs.

Although these checks are often random, they are designed to verify the legitimacy of the R&D tax claim, ensuring that the relief is rightly awarded. In 2021, the government launched an investigation into fraud and error in the R&D tax relief schemes and estimated the taxpayer's cost at £1.13 billion.

Having identified a large amount of careless and sometimes intentionally fraudulent claims, HMRC more than doubled the number of people working on R&D compliance, with an extra 300 people tackling non-compliance. HMRC also introduced a mandatory random enquiry programme (MREP).

Usually, random enquiries will appear as entirely boilerplate, asking for information that is often already provided in the AIF and potentially in a claim report originally submitted. If HMRC opens their questions with something outside of this standard text asking about the advances and uncertainties, then it’s likely that the claim has been picked up for a specific reason. HMRC may open by asking for confirmation on the field that the company works in, clarification on costs claimed across different periods, or even for you to confirm how many projects were claimed for.

Our Approach to the Enquiry

From the outset, our team at Myriad took the enquiry seriously, recognising the need for a thorough and robust response. We prepared a comprehensive 27-page response to the questions asked, as well as four detailed appendices.

Detailed Project Descriptions: Of the twelve projects claimed, five projects covering more than 50% of the R&D expenditure were written up, as required by the scheme. Each project required a separate and in-depth technical explanation to align with HMRC’s criteria, focusing on its advance and uncertainty. Four to five pages were written per project to sufficiently answer HMRC’s queries.

The Myriad team chose to focus its efforts on these five projects, given HMRC's relatively tight deadline of one month. We knew that the other seven projects would require longer than a month to prepare.

Supporting Documentation: The appendices included several key documents such as invoices, detailed reports on expenditure across R&D projects and a report on staff roles and their specific contributions to the R&D claim. The full claim report, which was originally submitted at the time the claim was made, was also included. These documents were crucial in providing a complete picture of the claimed expenses and the activities undertaken.

Our response was both comprehensive and polite, which is essential in maintaining a constructive dialogue with HMRC at this stage, considering the randomness of the check.

The Outcome: A Positive Resolution

Our efforts resulted in a positive resolution. HMRC reviewed our response and quickly accepted the claim without further queries. This swift resolution underscored the effectiveness of our approach: a meticulous, evidence-backed response demonstrating full compliance with the R&D tax relief guidelines.

Our experience shows that, contrary to common fears, an HMRC enquiry is not necessarily the death knell of a claim. In many cases, like this one, it is simply a check to ensure that the claim is accurate. Our success demonstrates that a well-structured response can quickly put the matter to rest.

Key Takeaways for Businesses Facing R&D Tax Compliance Checks

1. Be Thorough and Transparent: Provide comprehensive documentation that clearly demonstrates the eligibility of the claimed R&D activities. Detail every project thoroughly, addressing all questions posed by HMRC. Consider each question individually and back it up with reference to the BEIS Guidelines, where necessary.
2. Maintain a Professional Tone: Even if you feel frustrated by the enquiry, keep your communication polite and constructive. A measured approach can foster a more collaborative relationship with HMRC. In some cases, claimants have been able to settle any specific queries over a call with a member of HMRC’s R&D compliance team, instead of through repeated email communication.
3. Understand the Random Nature of Enquiries: HMRC's selection process for compliance checks is often random, with some claims being accepted and others rejected without a clear pattern. Don’t be disheartened if you receive an enquiry; it doesn’t necessarily indicate that something is wrong with your claim.
4. A Single, In-Depth Response Can Be Sufficient: A robust and well-prepared response can often resolve the issue quickly, saving you time and further hassle.

Further Correspondence with HMRC

But what happens if your response to HMRC is deemed insufficient?

In some cases, HMRC may have further questions following the first response. This may go back and forth a few times and HMRC may ask a standard list of penalty questions; you should answer those questions honestly, as this is HMRC’s attempt to assess if the claim was made negligently or fraudulently. Answering these questions is not an admission of making an invalid claim, and we recommend answering them as soon as possible to prevent any hold-ups in the process. HMRC may accept your claim at any time in this correspondence.

In the worst case, HMRC may reject your claim entirely. This usually follows a process of some back and forth with the R&D compliance team, possibly without contact with any specific case officer. At a certain point, HMRC may reject your claim by sending a formal closure notice. Claimants will have the opportunity to send a response if they disagree with this decision, outlining their reasoning. If HMRC still rejects the claim, the claimant can forward the dispute to HMRC’s Solicitor’s Office and Legal Services (SOLS) team. The SOLS team will review the case independently and make their decision. If the outcome is still negative, the final option is to go to a first-tier tax tribunal.

Myriad has experience in HMRC compliance checks at every stage, knowing when to apply pressure and what’s an acceptable response and what isn’t.

Learn more about our recent tax tribunal win 👉 Myriad Wins an Important Tax Tribunal Case for the Software Development Industry

What next?

As our successes show, an HMRC R&D tax compliance check doesn’t have to be a daunting experience. Our recent case demonstrates that a meticulous, well-prepared response can lead to a quick and favourable resolution. At Myriad, we understand the complexities of the R&D tax relief process and are here to help you navigate any challenges, ensuring you maximise your claim and maintain compliance with HMRC requirements.

If you have received a compliance check from HMRC and are interested in utilising our R&D tax enquiry support service, click here, message us, or call us on 0207 118 6045 to learn how we can assist you.