What is the likely outcome of an HMRC enquiry?
For a proportion of research and development (R&D) tax credit claims, HMRC ask for more information. This process is known as an enquiry, and there are several possible outcomes. A well-prepared and robust claim should withstand scrutiny and be paid to you once you have answered HMRC’s questions. If discrepancies are found, your claim could be reduced and even have penalties imposed. Enquiries may highlight better record-keeping requirements for future claims.
Any R&D tax credit claim submitted to HMRC will be reviewed. This is why, at Recoup Capital, we put so much time and effort into ensuring that the claims we submit are as thorough and well-presented for HMRC as they reasonably can be.
An R&D tax credit claim will usually be processed by HMRC without the need for an enquiry. In most cases, a desktop review of the claim documents will be sufficient for HMRC to be satisfied and to process the claim.
However, in a growing number of cases (especially in sectors like software), the inspector will ask for further information before reaching a conclusion – this is where the enquiry process begins.
What are the short-term implications of an enquiry?
In the short term, an enquiry means that payment of the R&D tax credit and/or tax repayment is likely to be delayed – although enquiries can sometimes happen after a claim has been processed. This will give the inspector time to ask questions to better understand the R&D and how the costs claimed have been arrived at. These questions will initially be asked by letter or email. But the inspector may want to meet the competent professionals who have assisted in the claim’s preparation.
Enquiry outcomes of a well-prepared R&D tax credit claim
Each of our claims is subject to a detailed quality assurance (QA) process, which includes a review by one of our in-house ex-HMRC inspectors before it is submitted. The purpose of our QA process is to ensure that all of our claims withstand HMRC enquiries. Therefore, in most enquiry cases, once further information and explanations are provided, the inspector is satisfied that the claim originally submitted was accurate and robust.
In these cases, the inspector will simply close the enquiry and arrange for the R&D tax credit and/or repayment to be paid. In other cases, where it is not possible to reach an agreement on every enquiry point, the enquiry may be settled by negotiation.
Enquiry outcomes of weak R&D tax credit claims
If your claim has not been robustly prepared, errors may be identified during the enquiry process. As well as leading to reductions in the claim value, HMRC may also consider whether penalties are due for carelessness or negligence.