10TH OCTOBER, 2019

What Power Does HMRC Have Over My R&D Tax Credit Payment?

HMRC are the gatekeepers of the public purse when it comes to R&D Tax Credits and it’s ultimately their decision to award the relief or not. Essentially, HMRC has the power to abstain from paying any R&D tax relief until it is satisfied that the claim is accurate, genuine and meets all the eligibility criteria.

What are R&D Tax Credits and how do they work?

Launched in the early 2000s, Research and Development (R&D) Tax Credits are a government-backed tax initiative which is meant to encourage UK companies to invest in innovation. A highly prized and welcome cash injection, they can help a business with a range of R&D projects, to hire new staff and to sustain robust growth.

Businesses which invest money in the development of new products, services or processes (or improve existing ones) may well qualify for financial assistance via R&D Tax Credits. Successful claim amounts can be received either as a Corporation Tax reduction or a lump sum payment. The good news as well is that it’s even open to lost-making companies.

The scope for identifying R&D is deliberately very large, covering projects in just about every sector. Additionally, companies making an R&D Tax Credit claim for the first time can typically receive the relief for their previous two completed accounting periods.

How do I know if my company qualifies for R&D Tax Credits?

To be able to claim R&D tax relief, your company must:

  • Have undergone eligible innovative activities
  • Be a UK limited company that is liable for Corporation Tax
  • Have spent money on these R&D activities

What counts as Research and Development?

The criteria as set out by HMRC is purposefully broad. Whatever project your business has in mind, and whatever sector it’s in, it’s all about the element of risk in attempting to resolve a scientific or technological uncertainty. If there is risk involved, then you may well be eligible as long as your business is:

  • Designing and building new products, services or processes
  • Modifying or updating a product or service that already exists

The key message is that if the purpose of your project is to solve a specific technological or scientific uncertainty - and has spent money in doing so - then it’s well worth putting in a claim. The project doesn’t even have to have been a success in order to qualify either, as long as an innovative process was undertaken. Businesses may also include work they have completed for a client in addition to their own R&D activities.

What costs can be applied when it comes to R&D Tax Credits?

When a company puts together its R&D Tax Credit claim, the following types of expenditure can be included:

  • Money spent on staff wages, pension contributions, employer’s NIC and reimbursed expenses
  • Freelancer and subcontractor costs
  • Materials
  • Consumables such as light, heat and power that have been transformed or used up in the course of the R&D activities
  • Payments to volunteers for clinical trials
  • Certain software types

So why might HMRC hold back my payment?

Getting your claim right first time is absolutely essential. If HMRC has any questions about the accuracy or preparation of your claim, it may begin an enquiry. If an enquiry occurs, the usual payment-processing procedure lasting 28 days will not be applicable; instead, HMRC will withhold the payment until it is satisfied with the entirety of the claim and any additional information has been reviewed.

Whilst the enquiry is ongoing, as questions are answered and the claim is investigated, companies are permitted to ask for a part-payment. This will reflect the amounts within a claim that have already been agreed upon. Once the enquiry has finished and HMRC is satisfied, any further amount that is owed will be released for payment, plus any accrued interest.

It’s important to note that even after an R&D Tax Credit payment has been processed and paid, HMRC are still within their rights to begin an enquiry. If the outcome of this enquiry is that HMRC is dissatisfied with any aspect of the claim, it may ask for the money back. HMRC also has the power to utilise the money for settling any outstanding tax liabilities..

Can HMRC make me pay a penalty if my R&D Tax Credit claim is incorrect?

If HMRC identify a mistake in an R&D tax relief claim, it may impose a penalty based on the Exchequer’s tax loss. How severe the penalty is will depend on whether HMRC believes the original claim was fraudulent, or that due care and attention was not given. However, if it does believe reasonable care was taken, and the company’s tax record is otherwise clean, it may use its discretion and apply a penalty of ‘nil’.

How much might an R&D Tax Credit penalty be?

The size of an HMRC penalty is likely dependent on the circumstances surrounding the claim. If it has grounds to believe that the tax relief claim was deliberately evasive, fraudulent or inaccurate, penalties could be as much as 100% of the tax lost. However, if a company is responsive and open with HMRC, and willingly provides any extra information required, a lighter penalty may be issued to reflect the mistake. It may even be possible to receive a reduction or abatement for good behaviour in addressing any errors, as long as you have conducted yourself in a helpful and sincere manner.

Penalties may also be suspended to give a company time to address the reason for the mistake. For example, it might need to improve its accounting practises or record-keeping. A review date must then be adhered to.

This is why it’s so important to speak to the experts

Tax Cloud UK is part of Myriad Associates, an expert team of experienced R&D tax consultants. We will be pleased to answer any questions you may have, allay any fears and work with you to facilitate your R&D Tax Credit application to give you the best chance of a success and maximising your claim.

Sign up to Tax Cloud to today to begin your R&D claim. With separate service offerings for both businesses and accountants, using Tax Cloud is a fast and accurate way of claiming R&D tax credits in 2019.

To discuss anything further, call us on 0207 118 6045 or use our contact page for excellent quality, professional advice.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Myriad are the creators of Tax Cloud, we help enterprises navigate, apply and secure tax incentives and grants. We specialise in R&D Tax Credits, Creative Tax Reliefs, Innovate UK grants, Horizon Europe grants, and R&D Capital Allowance Claims.

  • Submitting R&D tax claims since 2001
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Meet some of the team behind Tax Cloud

Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
Jillian Chambers Jillian Chambers Technical Analyst/Writer
Lauren Olson Lauren Olson Technical Analyst Manager
Rabia Mohammad Rabia Mohammad Corporate Tax Associate