R&D tax relief: HMRC still rejecting valid claims

The CIOT has written again to HMRC about the issue, following an exchange of letters over the summer.¹

The Institute agrees with HMRC that action is needed to tackle error and fraud in R&D credit claims but does not believe the 'volume compliance' approach that has been followed by HMRC since late 2022 is the right tactic.

Ellen Milner, CIOT’s Director of Public Policy, said:

"R&D tax credits are intended to support the UK’s ‘push for growth’,² but frustrating enquiries resulting in the rejection of legitimate claims are undermining this. Businesses are being put off claiming relief to which they are entitled.

“Abuse of R&D relief is a genuine problem, and HMRC should take appropriate action to tackle it.  However, as well as correctly catching invalid claims, a large number of valid claims are being rejected or withdrawn due to the ‘volume compliance’ approach being taken. HMRC are undermining confidence in R&D tax relief, having eroded the trust that they will accept or properly consider legitimate claims.

“In our view, the balance between tackling the problems of error and fraud and the impact on compliant claimants is currently tilted too far towards the former. Genuine claimants and compliant taxpayers should not suffer because of the bad behaviour of others.

“A particular issue is HMRC’s use of a power intended for correcting returns that contain obvious errors.³ Instead of opening a compliance check to investigate an R&D claim , in an unusual development HMRC have started to use this power – known as ‘paragraph 16’ – to correct corporation tax returns by removing the R&D tax relief claims where they believe the information provided to them indicates there is clearly not any R&D. This approach goes beyond the previously understood scope of ‘paragraph 16’ and HMRC’s own guidance, and could amount to an abuse of power, as it circumvents the enquiry process. We have shared these concerns with HMRC and welcome, in light of these, their commitment to reviewing the approach with respect to R&D.

“We are aware that HMRC are taking steps to improve their training and assurance processes. Also, at the Autumn Statement, the Chancellor announced that HMRC will be publishing a compliance action plan in due course. We hope that this will be as effective as possible in tackling error and fraud, while redressing the balance towards a fair enquiry process for all claimants.

“We support HMRC in their efforts to tackle error and fraud and are committed to our role in upholding professional standards in the tax service industry.⁴ In this vein, we look forward to continuing our engagement with HMRC on this issue, and working with them to try to improve things.”

Notes for editors

1. CIOT letter dated 11 December 2023; CIOT letter to HMRC dated 3 July 2023 and HMRC’s response dated 29 August 2023.
2. For example, Financial Secretary Nigel Huddleston, Q84, House of Lords Finance Bill Sub-Committee hearing, Wednesday 29 November 2023.
3. Paragraph 16 of Schedule 18 to FA 1998 (Correction of return by Revenue).
4. 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.