HMRC R&D Tax Credit Relief enquiries

Navigating the maze of HMRC R&D Tax Credit Claim Enquiries

Reflecting on my decades at HMRC and the numerous tax checks I've been part of, it's clear that dealing with an HMRC enquiry isn't straightforward, especially for newcomers. Enquiry work can seem complex at times. Many may claim that they can handle HMRC easily, but in reality, managing an HMRC Tax Enquiry is far from simple. Working on HMRC Tax Enquiries can feel like a dark art at times, and in reality, navigating the HMRC Tax Enquiry process is challenging for even HMRC Enquiry Officers.

From my experience, most cases take an average of 8 to 12 months to conclude, and that's if the issues are straightforward. Therefore, the best that most can do is to try to manage and steer the situation effectively. Therefore, be cautious of those claiming to be 'experts', 'experienced', or ‘tax dispute resolution experts’ in HMRC tax enquiries. Ask for proof of their claims here, and if all they give you is verbal responses that is not proof. They should be able to provide you with their tax qualifications and testimonials.

Don’t be fooled by those claiming they are ex-HMRC. Not all HMRC officers are trained to conduct a full tax enquiry, shocking I know, so ask for proof of the credentials of an ex-HMRC officer claiming to have expertise in tax enquiry work, from the first issuance of the official notification right through to a full-blown tax tribunal. Do that and you will find a very high percentage of claims fall by the wayside.

From my 40 years of engaging with various firms, even the big four UK accountancy practices perform average at best. While I have encountered some highly skilled professional tax agents and accountants in enquiries, they are rare and not always well-known names. In tax enquiries, your reputation hinges on your latest HMRC tax enquiry, in effect you are only as good as your last HMRC Tax Enquiry.

So, you might be wondering, “Why should I keep reading the rest of this?” Well, there are indeed ways and means to handle HMRC tax enquiries, and having been on the inside conducting numerous types of tax enquiries, investigations and checks, I've seen how quickly things can go awry, often through no fault of any individual. Understanding where things can go wrong and having a deep insight into the entire process and purpose of these checks only comes with experience.

Common queries and uncommon realities

Tax accountants, agents, advisors, and clients frequently ask me two key questions:

1. Does HMRC make mistakes in their enquiry checks, and can I use that to get my client out of trouble?

2. And where do they make mistakes the most?

The short answer to the first question is a definite “Yes, mistakes happen daily.” With around 70 million interactions, occasional slip-ups are inevitable. As I said above, HMRC tax enquiries are complex and HMRC officers are only human after all. Any suggestion and calls for simplifying HMRC tax enquiries is a pipe dream. Tax can be, and is, very complicated. Consequently, the process for assuring and checking compliance with the tax rules will always have to reflect the complex nuanced nature of the tax or duty being investigated. 

The second question is crucial. To save time, here’s a list of common errors HMRC officers make:

a)      Incorrectly opening an enquiry under the relevant tax legislation.

b)     Misapplying or incorrectly referencing the rules.

c)      Failing to fully understand the information provided.

d)     Making procedural mistakes.

Experienced fully tax-trained HMRC enquiry inspectors do not make any of the above errors in their enquiries. However, seasoned inspectors are rare today; most HMRC Enquiry officers have less than two years’ experience in tax enquiry work. When I started, the average length of experience was closer to 10-15 years. Wisdom truly flourishes around the five-year mark in tax enquiry work.

The average level of experience for many HMRC enquiry officers is between 18 months to two years before they decide it’s time to move on from this tough gig. Therefore, the real risk often lies with inexperienced HMRC Enquiry Officers, who may not be fully trained across all taxes, or to a sufficient extent in the specific head of tax they are checking, for example, R&D Tax Credit Relief.

Avoiding and addressing mistakes

While some may think the above-listed errors could invalidate an enquiry, none are insurmountable for a seasoned HMRC Tax Inspector, who can adjust to correct or accommodate such shortcomings, legally, in their enquiry to continue the checking process. Remember, mistakes aren’t exclusive to HMRC; they occur with the client and the tax advisor/agent/accountant as well. No one is infallible. So, how should you handle a tax enquiry? Here are my top tips:

1.      Stay calm and positive: Tax enquiries are undoubtedly stressful, but they don't all have to be negative. I recall one chap who welcomed his enquiry because he saw it as a way to identify and correct any bookkeeping issues, potentially saving on accountant fees. (In case you’re curious, his books were in good order, with only minor errors. No additional tax or penalties to pay.)

2.      Don’t panic: Sometimes HMRC selects a business at random. If the client is good, you should be okay.

3.      Expect the check to find errors: No one is perfect, and mistakes are bound to have been made during a financial year. The goal is to demonstrate that any errors were innocent. However, this is easier said than done with the inexperienced HMRC enquiry officers, so it’s crucial to have the right expertise on hand.

4.      Build a rapport: If you can interact with the tax inspector, do so professionally. Don’t get combative, it rarely helps. HMRC still has enough seasoned inspectors to provide support for challenging enquiries, so now you will have two HMRC officers on the case instead of one. Trust me on this one, proactively engage with the inspector, understand what they need, and provide it. This might bore them enough to close the enquiry and move on to another case.

When I encountered a good tax professional (knowledgeable tax accountant), who was open and transparent, they normally were good at managing both the client and my tax check efficiently. Usually by getting information, documents and meetings delivered and arranged and in doing so my check was done in half the time. And if there were penalties, the chances are I did all that I could do, within the rules, to mitigate them, all because of the professionalism of the agent, who made the client look good.

Unfortunately, in an HMRC R&D enquiry, some of the HMRC enquiry team involved is faceless and nameless, meaning that it is not possible to hold anyone person accountable if things are not done correctly. Problems can also arise because it is simply impossible to build any rapport with inconsistency in the sheer numbers of HMRC officers all having some involvement in handling your enquiry. These officers follow a process, designed to drive the process forward at pace. It is a task-orientated process with officers picking up different cases for the first and last time to follow up on the action of their predecessor with little time or knowledge to check if the action/conclusion taken before is correct.

In addition, HMRC has decreed that these enquiries into the SME population claiming for R&D tax credit relief are conducted entirely by correspondence, making any attempts at building a meaningful rapport and understanding almost impossible at times. These types of enquiries are best typified as being carried out at long range, ponderously allowing for delay and misunderstandings to arise and speculative conclusions to flourish on the part of these HMRC enquiries, to the determent of a company's valid claim. 

5.      Never go it alone: Never speak to a tax inspector without someone knowledgeable in the tax matter in question and enquiries by your side. It’s not that the tax inspector is trying to trip you up. I never needed to do that, as people often trip themselves up. It’s just that tax can be complex, and enquiries can become very intricate. Miscommunication is a real danger for everyone involved. 

Conclusion

These few insights can help navigate HMRC enquiries more effectively. Despite challenges, having the right approach and the support of a specialist expert can make all the difference.