Winning against HMRC: Claim accepted in full following R&D enquiry in 2023
2023 is proving to be a difficult year for R&D enquiries. Is it still possible to achieve a positive outcome?
In the R&D tax relief world, HMRC’s new approach to enquiries has ruffled a lot of feathers. Since late 2022, they have opened enquiries into an unprecedented number of claims – and even conservative accountants have been caught in the net.
And it’s not just the number of enquiries that’s causing issues, it’s the way that HMRC is approaching them. Their default assumption seems to be that none of the claim’s expenditure qualifies, with their questions designed to evidence that negative position as quickly as possible.
However, even in this difficult atmosphere of frustration and distrust, it’s still possible to achieve positive outcomes for R&D claims under enquiry.
Just your average R&D enquiry
One such example started much like any other. The claim had been submitted by an accountancy firm for a company with a software project. The company had a handful of employees, low six-figure turnover and was loss-making with substantial carried forward losses. The payable cash credit was less than £10k, which under more normal circumstances would be considered low risk. Yet HMRC opened an enquiry anyway, kicking off with a 12-question template.
The client was understandably concerned – on several counts. How long was this going to take to resolve, and would it affect their ability to make claims in the future? Had they inadvertently done something wrong, and if so, would HMRC apply a penalty? If HMRC denied the claim, what would this mean for all their historical claims – were those at risk too?
The accountant was almost as concerned as their client. They worried that perhaps they’d misunderstood what their client had done or described it in the wrong way. They were also concerned that if this claim was rejected, HMRC might systematically go through their other clients to see if those could be overturned too.
Realising they needed some specialist help, they reached out to us for Claim Support.
Crafting a strong defence for a software R&D claim
Software is one of the trickier sectors for R&D tax relief, as clients often confuse or conflate commercial and technical innovation. So, the first thing we recommended was that the client undertake an exercise in which they classified their development tasks, or ‘tickets,’ into different categories. This identified the area in which their technical challenges were concentrated.
We then drafted a response for HMRC that clearly and concisely answered all of their 12 questions. In the appendix, we included the results of the client’s classification exercise. This showed that the boundaries of R&D had been set appropriately.
HMRC then wrote back to say that none of the client’s work was considered to be R&D. Bummer. But not unexpected, since that’s what they seem to be doing in most enquiries at the moment.
How we argued the case with HMRC
However, on reading their letter closely, HMRC’s logic seemed to be flawed in a number of areas. We went through their reasoning in detail, identifying each area of concern and drafting a rebuttal that explained why HMRC’s conclusion was based on an incomplete understanding of the facts.
Several weeks later, the company received a final closure notice. This simply stated that HMRC’s conclusion was ‘Your return does not need to be amended.’
The moral of the story being that perseverance can pay off – and that it’s good to get specialist, external support early in the enquiry process. Even although HMRC is currently taking a very hard-line approach in R&D enquiries, it’s still possible to get them to back off if you stick to your guns and present a reasoned and well-evidenced argument.
Where to get support with your R&D tax relief enquiry
If you’re currently dealing with R&D enquiries and defending them yourself, you’ll be interested in our new guide, How to handle an R&D enquiry. It’s free to download and gives you really clear guidance on how to respond to HMRC’s typical enquiry questions.
Or, if you feel out of your depth and want more experienced support, join The R&D Community so you can access our Claim Support service. Many firms are already members, and are using our R&D Helpline, training courses, customer forums and consultancy-on-demand to build confidence in their teams and deliver an even higher level of service to their clients. See all the benefits of membership and sign up.
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