What should I do if HMRC decides to keep my R&D cash?
Whether its the first time or the fifth time your company has submitted an R&D tax credit claim, rather than receiving your cheque from HMRC, you might get a wordy letter.
It goes something like this: “The BIS Guidelines refer to an advance in science or technology as an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability per se).
“It is important to note that a process, material, device, product, service or source of knowledge does not become an advance in science or technology, simply because science or technology is used in its creation.
“A work that uses science or technology but does not advance scientific or technological capability as a whole is not an advance in science or technology. This is at the core of what needs to be illustrated.”
So much for that cheque, right? Most companies that receive this notice wonder what the above statement means and generally ask the following questions:
1. Does this mean the claim been denied?
2. Will my business be denied R&D tax credit funds going forward?
3. If I am not able to get my funds via R&D tax programme, how can I increase my present level of research and development spending?
First and foremost, it should be made clear that this is a general and common response issued by HMRC when it makes an enquiry into any tax relief claim.
The wording of the enquiry is enough to make one’s head spin, leaving claimants uncertain of what to do next.
The first thing to understand is that when you make a claim, the HMRC inspector is able to request further documentation if they feel it is necessary to evaluate your claim.
The purpose of this documentation request is the need to display technological advancement and the field of science in which the advancement has occurred.
The ability to clearly indicate how this departs from the standard industry practice is also instrumental in convincing HMRC that a technological advancement has occurred.
Through either written communication, telephone discussions, or even a site visit by the HMRC reviewer, it is critical to illustrate the technological uncertainty, when the uncertainty was established and how it was investigated and what new body of knowledge was gained to form the technological advancement.
The facts you provide to HMRC, whether in written or verbal format, should center on the underlying technological specifications that needed to be achieved in order to consider the project a success.
Often times, when claimants respond to this type of enquiry, they tend to focus on the commercial objectives of a given project, which are not at all what HMRC is after.
Inspectors now have the ability to draw on the expertise of HMRC’s own chief technology officer and in-house teams that manage their IT systems when it comes to assessing claims in the area of information and communications technology.
Therefore, businesses making these claims should be prepared to receive queries similar to the one above, if HMRC assesses that there is a risk of non-compliance in their claim due to lack of supporting materials, or poorly prepared supporting materials in their claims.
Outside of the above, HMRC also has new external resources at its disposal that helps inspectors assess R&D claim submissions.
Specifically, they may bring in an external technical expert, such as engineers who they consider to be competent professionals to review the technical merits of a claimant’s work.
If you have submitted an R&D tax credit claim and received a response similar to this, do not assume that your claim will be denied.
The HMRC inspector should be open to a dialogue to arrive at a mutually agreeable conclusion so that you understand and agree with their decision.
In the event that you do not agree with their assessment, it is worth noting that many court cases have ruled in favour of the taxpayer in R&D tax credit cases, whereby HMRC argued against the technological advancement sought or achieved.
Even if you are unable to convince the reviewer that your entire project qualifies, there can be an opportunity to make a case for certain aspects or elements of the project to be considered eligible.
However, you should avoid reducing your analysis to a level that is technologically too ordinary and keep in mind that a system-level uncertainty relating to how different pieces of a technological system interoperate can result in a technological advancement.
Above all else, if at any time you feel as though you are in over your head, nothing beats receiving support from a competent R&D tax consultant who knows the best ways and methods to address HMRC queries to arrive at a positive outcome.
A.K. Hajee is an R&D tax credit consultant at RDP Associates with over 15 years’ of experience across over 3,500 successful R&D tax relief claims for his clients.
For a complimentary assessment of your eligibility for R&D tax credits or an assessment of your existing enquiry, you can email A.K. Hajee at firstname.lastname@example.org
Published: 10 August 2018