By Alex Nicholson of James Cowper Kreston.
HMRC has significantly increased scrutiny of R&D tax credit claims leaving many SME businesses frustrated and out of pocket.
How should a business respond to formal HMRC enquires and is further reform of R&D tax credits needed?
The R&D tax credit regime has been a bedrock for health tech businesses, providing a valuable tax credit on research and development by reducing corporation tax and for pre-revenue (or other loss making) businesses a much-needed boost to cash flow.
Following Government suspicions of widespread fraud and errors that it estimates cost UK taxpayers £1.13 billion per year, the Government introduced further checks on R&D tax credit claims from SMEs.
Professional advisers are seeing claims challenged and, in some cases, turned down by unnamed individuals at HMRC without valid explanation.
HMRC has long had in place a team of specialist R&D caseworkers that quite rightly challenges claims, seeking further information or clarification from businesses before making a decision.
However, HMRC has now introduced an additional team of 300 R&D caseworkers in its efforts to reduce errors and stamp out fraud. Some claims are being questioned or refused with seemingly incorrect understanding or recognition of the merit of the claim.
To add further frustration, businesses are not allocated a named caseworker within the new team, have little or no ability to meet with them to challenge a decision and defend their claim.
Detailed technical reports often appear to be misunderstood, with HMRC caseworkers overriding the view of the claimant’s experienced competent professionals as to what constitutes and advance in science or technology.
The concern is that the current approach will leave genuine R&D businesses questioning the point of the time, expense and uncertainty of making a claim.
No doubt, the Government will claim its efforts to stamp out error and fraud a success, but in doing so has it lost the guiding purpose of the R&D tax credit regime?
So how should a business respond when its claim is questioned or rejected?
Firstly, do not ignore the correspondence from HMRC. Take professional advice from someone who is experienced in dealing with HMRC R&D enquires. Be collaborative, HMRC’s queries should be fully answered in a timely manner.
Where there is dispute, HMRC caseworkers in the new team appear unwilling to meet. Sadly, this means there is limited chance to fully and openly discuss the case for your claim.
If the matter is unresolved and HMRC move to close the enquiry by reducing, or worse still, denying the R&D tax credit claim in full, then the taxpayer has several options open to them by appealing the decision.
The first step will often be to request an HMRC internal review which is governed by statutory timelines and must be conducted by a tax officer who was not involved in the original decision.
If still unresolved and the claim is worth pursuing, taxpayers can apply for Alternative Dispute Resolution (ADR).
If accepted, then HMRC will be required to attend a meeting which will be facilitated by a HMRC mediator. This process will add considerable cost and will take some time.
Ultimately it all else fails then the taxpayer can appeal to the tax tribunal, but this is a significant and costly undertaking.
Health tech businesses with valid claims, even if quite sizeable, are already looking at the associated costs and time; some are deciding that it is simply not worth their trouble.
And that should concern the Government, particularly with its desire to see the UK as a science and technology superpower.
There is no doubt that the R&D tax credit regime needs greater scrutiny, but the general view of tax professionals is that the current process risks swinging too far in the wrong direction.
The very businesses the Government wants to support are now being penalised by further costs and uncertainty.
Alex Nicholson is a partner at the accountants and tax advisers James Cowper Kreston. He can be reached by email.