10 reasons your R&D tax relief claim may get you into trouble

R&D tax relief has complex rules, so it is no surprise that not every claim for R&D relief will be 100% accurate. This can be through genuine mistakes, such as errors in the computation of a claim, or through a misunderstanding the rules and making claims for projects or expenditure that do not qualify. Finally, HMRC and National Audit Office also consider there is a significant element of fraudulent abuse of the R&D scheme.

HMRC works to ensure that only businesses that undertake genuine R&D activities obtain the R&D tax relief according to the strict definitions in the UK tax legislation. HMRC has always opened enquiries into company tax returns to question R&D claims. The volume of enquiries is increasing, with an additional 100 HMRC inspectors focusing on compliance checks for R&D claims.

We are now frequently seeing businesses receive enquiry opening letters or ‘nudge letters’ from HMRC to check their historic R&D claims. These letters require businesses to provide significant levels of information in support of their claims.

It has never been more important to ensure the accuracy of your R&D claims and to work hard to avoid the most common pitfalls.

The 10 most common errors in R&D claims

The most common errors in R&D claims that lead to a HMRC enquiry or require a voluntary disclosure involve:

1. Businesses that claim under the wrong scheme, often when they do not qualify under the SME scheme
2. Incorrectly claiming for subcontractor and subsidised costs under the SME regime
3. Claiming excessive staff costs and, more recently, claims for staff furloughed under the Coronavirus Job Retention Scheme (CJRS)
4. The inclusion of consumables which have not been used up or transformed in the R&D
5. No or insufficient documentary evidence to support a claim – you will need to satisfy HMRC of the accuracy of the claim
6. Claims for commercial, rather than scientific or technological advances
7. Failing to properly explain complex technology or engineering – creating a situation where the HMRC Inspector does not fully understand a business or its activities
8. Foreign businesses with UK subsidiaries that misunderstand the UK rules
9. Taxpayers taking insufficient care to check claims, or not providing the right information on the specifics of the claims to advisers.
10. Fraudulent claims.

Help to put things right

It is important to realise that the responsibility for R&D tax relief claims lies with you and your business. Even if you have paid advisers to prepare your claims to be submitted to HMRC, you will be liable for any incorrect or false claims and for (re)paying any tax reliefs and penalties.

If you would like expert advice and support to avoid these common mistakes and manage your R&D tax relief claims, please contact Cathy Kelly.