HMRC's R&D Compliance: Understaffed and Undertrained?

Guest article written by Adam Craggs at Reynolds Porter Chamberlain LLP (RPC)

This article has been written by Adam Craggs of Reynolds Porter Chamberlain LLP (RPC) and the opinions and views stated in this article are those of Adam Craggs and not Howden Insurance Brokers Limited (“Howden”). Howden is an insurance broker and is not authorised or regulated to advise on proposed changes to the SRA fining framework. Howden shall not (i) owe or accept any duty, responsibility or liability to you or any other person; and (ii) be liable in respect of any loss, damage or expense caused by your or any other party’s reliance on this article.

While the government's intention to merge the existing SME and R&D Expenditure Credit schemes into a single scheme may grab the headlines, there remain significant issues with the administration of the existing R&D schemes that are unlikely to be remedied by the proposed changes.

We are aware of multiple instances of R&D enquiries being under-staffed with HMRC case workers who are not adequately trained to conduct enquiries into what is a highly technical area.  Obtaining the contact details of the individual who is running the enquiry so that one can engage in a meaningful discussion is nigh on impossible and correspondence – when it arrives – evidences a failure to engage with the evidence presented by the taxpayer (including in-depth technical data being dismissed by HMRC officers as a result of their misinterpreting a basic internet search).  This has an impact on any professional adviser handling an enquiry based on R&D credits on behalf of a client, and on any insurer providing cover under a fees protection policy.

There have been numerous instances of HMRC's Fraud Investigation Service sending pro-forma letters to businesses whose R&D claims have already been allowed, stating that HMRC suspect their claims to be fraudulent without providing any details whatsoever. Such a serious allegation (which by necessity involves an allegation of dishonesty) should not be made likely and without a valid basis. When requested to confirm the basis of the allegation, HMRC is generally unable to provide any further details.  Even if the eventual upshot of the criminal investigation is a 'no further action' letter, being subject to a criminal investigation is extraordinarily stressful for those involved, and takes up a great deal of management time (not to mention the significant professional fees that are inevitably incurred when a business is faced with allegations of this nature – which businesses will frequently seek to recover under a D&O policy).

This approach to R&D claims is consistent with the message presented by the relatively recent report of the Public Accounts Committee, 'HMRC performance in 2022-23'.  This report notes input from organisations representing tax professionals highlighting 'concerns about the impact of HMRC's volume compliance approach on companies' and noting that 'HMRC compliance staff [treat] companies with suspicion and lack the necessary expertise and training to determine whether projects qualify as research and development for tax purposes' (paragraph 17).

HMRC does not, apparently, agree with the suggestion that its approach has discouraged R&D investment.  Although it is accepted that HMRC lacks a significant quantity of (to give their example) engineering experts in-house, HMRC claims that 'these are typically not needed for volume compliance work' and that 'it can bring in expertise externally or from other parts of government' when this expertise is required.

Professional bodies (notably the Chartered Institute of Taxation) have been engaging with HMRC with a view to improving their approach.  This discussion has borne some fruit: HMRC say that they are working on improving escalation routes (to deal with the issue of enquiries being handled, at least initially, by those without the necessary technical expertise).  HMRC expect to publish a 'compliance action plan' to set out a timeline for dealing with many of the points raised by professional bodies.

We understand that (at the time of writing) the launch of a "R&D disclosure facility" is imminent.  While this will be aimed primarily at those who have made R&D claims that they know contain errors (or that they no longer consider to be valid at all) – which may of course be relevant in considering how to mitigate loss for those who have received negligent advice - it is to be hoped that its knock-on effect will be to remove spurious R&D claims from the general population, enabling HMRC to focus on the proper conduct of substantive enquiries.  This in turn should speed up those enquiries, lessening the burden that they place on businesses, their advisers, and their insurers alike.