Navigating Tax Compliance Challenges in R&D claims: A Case Study of Persistence

Should you give up on your R&D tax credit claim when HMRC decides your projects don’t qualify?

My answer is usually NO, don’t give up if you believe in your claim, because even at the late stage of Appealing against an HMRC Closure Notice denying your claim, HMRC’s decision can be overturned. The following story is an example of this. My only proviso is that the R&D claim value needs to be worth the time and effort spent in defending it. Actually I am also very motivated by the principle that if all involved firmly believe the claim meets the Research and Development Tax Relief Guidelines, HMRC should not be allowed to get away with denying it.

In the following case my client’s claim was worth £44,000 which was critical funding for this early stage Small & Medium Enterprise (SME), working at the juncture of cosmetic and pharmaceutical product development.

This story demonstrates how important it is not to give up in the face of significant challenges from HMRC under the SME R&D Tax Relief/Credit compliance check process.

Timeline of Events:

The R&D claim was for an accounting year ending 30th June 2021. The R&D claim was submitted in the first quarter of 2023 and settled with the company receiving a payable tax credit soon after.

23rd November 2023: The company’s compliance check journey began when HMRC issued a Corporation Tax Compliance Check notification letter, with a long series of questions concerning the company’s R&D tax credit claim.

12th December 2023: In response, the company (advised and supported by me) submitted a detailed nine-page letter, providing all the requested information and outlining its innovative work undertaken in the development of advanced cosmetic product formulations. The company was confident, as was I, that its extensive R&D efforts met the criteria for tax relief, and the response aimed to clarify any misunderstandings HMRC might have had.

29th February 2024: Despite the company’s detailed submission, HMRC concluded that the R&D claim should be rejected. In a letter dated 29th February 2024, HMRC stated: “It is my view that the R&D claim should be rejected in its entirety. As explained above, I do not believe the project satisfies the R&D criteria outlined in CIRD81900”. The letter offered the company the option to either accept the judgment or provide further information to defend its R&D tax credit claim.

16th April 2024: Faced with this rejection, we responded with a comprehensive 11 page letter of defence, supported by additional documentary evidence. The company also requested an extension of ten working days to provide more information from its R&D technical lead, who happened to be based in Australia, citing extenuating circumstances. On 29th April 2024, we delivered another 13 pages of additional and/or restated, mainly technical, information, rigorously defending the R&D work undertaken.

26th June 2024: Despite the company's robust defence, HMRC issued a ‘Closure Notice’ that upheld the decision to reject the R&D claim and closed the compliance check. The notice provided detailed reasons for the rejection and concluded: “I still believe that our view to reject your claims for R&D tax relief and tax credit remains correct”. The notice indicated that the company’s tax position would be amended and a repayment of the substantial tax credit would become due. This was a huge blow and very disappointing as we were all convinced the company’s projects qualified. At this stage a company has the right to Appeal the HMRC decision.

12th July 2024: Undeterred, we formally appealed the decision. In an 11-page appeal letter, the company, supported and guided by me, robustly challenged HMRC’s application of the Guidelines as set out in its letters and provided detailed arguments as to why the claim should be accepted. The appeal focused on restating the technical complexities and innovative nature of the R&D activities, which the company believed had been misunderstood or ignored so far. We attacked HMRC’s application of the R&D Guidelines and cited R&D Tribunal cases which supported the company’s points of contention with HMRC’s views. Plus we asked HMRC to explain what evidence it had to support its views, which we said, seemed to be wholly unfounded on the facts of the claim.

14th August 2024: Our persistence paid off. After considering our appeal letter and the extensive documentation provided prior to the appeal letter, HMRC reversed its decision, stating, “I have allowed your R&D tax relief in full and can conclude that your claim is successful.” Thus the company’s claim, worth £44,000 as a payable tax credit covering a single accounting period did not have to be repaid. Of course we were all delighted but it took quite a bit of effort, including a lot of reiteration of points already made in prior letters, to finally get the claim accepted. This was time which could have been better spent elsewhere!

We suspect that we were dealing with a very inexperience HMRC offer (of which there appear to be too many) and that only at the appeal stage did a more experience HMRC officer review our claim. At no stage were we able to deal with a named officer and this now appears to be the norm in SME R&D Tax Relief/Credit compliance checks.

Key Takeaways:

This case exemplifies the challenges SME companies may face when their R&D tax credit claims are scrutinized by the UK tax authorities. It highlights several crucial lessons:

1. Persistence is Key: The company’s (and my own) determination to pursue its claim through several stages of rejection, was critical in achieving a favourable outcome. Companies should not be discouraged by initial rejections and should be prepared to rigorously defend their claims.
2. Thorough Information is Required: The extensive documentation and counter-arguments compiled at each stage of the process was critical to a successful defence of the claim. This illustrates the importance of preparing detailed and clear information on R&D activities and accurate financial information at the point of the initial R&D claim, so that information is at hand and no errors are discovered when a claim is put under scrutiny.
3. Understanding R&D Guidelines: The case also highlights the importance of fully understanding the relevant R&D tax relief Guidelines (outlined in CIRD81900). By aligning our appeal with the Guidelines, we were able to convincingly rebuff HMRC’s poor judgements on qualification and poor interpretation of the R&D Guidelines.

In conclusion, this case serves as a powerful reminder of the importance of perseverance in the face of what can often feel like overwhelming pressure from HMRC.

If you’d like help with an HMRC R&D tax relief/credit compliance check or with making R&D claims get in touch for an informal chat.

Author: Linda Eziquiel, Regional Director, RandDTax