R&D claims: CIOT welcomes HMRC recognition that improvements are needed

4 Sept 2023

The Chartered Institute of Taxation (CIOT) has welcomed HMRC’s acknowledgement that their handling of some research and development (R&D) tax relief claims has not met their own standards and commitments under their Charter, and that they are taking steps in response to improve their training and assurance processes.

However, the Institute remains concerned that HMRC’s ‘volume approach’ to managing R&D enquiries means that legitimate claims will continue to be rejected, and the underlying objectives of investment in innovation and economic growth will be undermined as businesses are put off claiming relief to which they are entitled.

HMRC have responded to a letter the CIOT wrote in July1, that shared with HMRC its members’ concerns around how the tax authority are conducting R&D enquiries into claims by small and medium sized enterprises (SMEs). The exchange of letters focuses on the ‘volume compliance’ approach adopted by HMRC since the latter part of 2022.

Ellen Milner, CIOT Director of Public Policy, says:

“We welcome HMRC’s response to our letter, which acknowledges the issues that we raised and sets out how HMRC are going to address them. We also welcome the open dialogue that we have had with HMRC about compliance.

“We recognise that the amount of abuse of R&D relief is a significant problem, and HMRC are right to be prioritising action to tackle it2. We support them in their efforts to do this and are committed to our own role in upholding professional standards in the tax service industry. But HMRC’s actions must lead by example and be in accordance with their professional standards and Charter commitments, as well as, of course, the law.

“We remain of the view that the current volume compliance approach does not work well for R&D tax relief claims, due to the complex nature of the relief and the technical consideration required in ascertaining whether or not there has been a qualifying R&D project. We have had a lot of positive feedback from businesses and advisers since publishing our letter, demonstrating that the problems we highlighted are widely experienced and the views we expressed are widely held.”

The volume compliance approach is based around frequent challenge and standardised letters with little or no opportunity for businesses and their advisers to explain the R&D activity they are engaged in. Whereas historically conversations were an important mechanism through which R&D could be explained to HMRC, under the new approach there has been no direct engagement between the compliance team and the claimant, either in person or virtually.

The new approach has been adopted by HMRC in response to the high level of fraud and error that has been identified in relation to R&D tax relief claims; HMRC consider that it is achieving results in terms of identifying errors and fraud. In adopting this approach to tackle the scale of the issue, HMRC’s letter says that the ‘reforms and operational action required to tackle the problem will have an impact on compliant claimants.’

Ellen Milner responds:

“We accept that there will be an impact on all claimants of R&D enquiries, and we and our members also want bad claims rooted out from the system. However, the impact of HMRC’s compliance approach should not be the refusal of genuine claims, especially without due consideration of the facts and opinions of experts, reasoned judgments or proportionate engagement with taxpayers and their agents.

“We welcome that HMRC’s letter says that going forward it may be possible to have a meeting (Escalation processes), but it is not clear how this avenue will operate in practice. We are disappointed that determining whether a meeting is necessary (a higher bar than a meeting being helpful) seems to be solely within the discretion of HMRC.

“The compliance processes should support the policy objective of encouraging R&D and deliver a proportionate, fair and consistent treatment of taxpayers and agents. The ‘bespoke one-to-one service’ referred to in HMRC’s letter is not what is being asked for – our members just want a fair hearing where evidence is given, and for HMRC to correctly apply the guidelines around what is R&D and whether a penalty is due.

“We hope the new compliance measures that came into effect in August 2023 noted in the letter will help HMRC identify risk areas and better target compliance activity. We also welcome the training of HMRC R&D teams. We look forward to working with HMRC to improve things, including around ensuring all agents understand what is required in relation to claims for R&D relief. We are always keen to support our members and ensure high standards3.”

Notes to Editors

  1. CIOT shared with HMRC its members’ concerns around how HMRC are conducting R&D enquiries into claims by small and medium sized enterprises (SMEs), in a letter to the Director of Wealthy and Mid-Sized Business at HMRC. This letter and HMRC’s response can be read here.
  2. CIOT responded to the HMRC's Annual Report and Accounts, 2022 to 2023 published on 17 July 2023: Action on R&D error and fraud vital but should not be at the expense of genuine claims, Institute urges (tax.org.uk).
  3. Our Professional Conduct in Relation to Taxation PCRT rules include Topical guidance covering the application of professional standards to the provision of R&D tax credit services.