HMRC, for small/medium R&D claims, has recently moved away from having a dedicated inspector assigned to compliance checks (a.k.a an enquiry) in favour of a more helpdesk style system and is using template letters as part of this process.

The 1st letter HMRC sends out as part of an enquiry is a screening letter which asks for a bit more information about the R&D claim, even if this information has already been provided, and based on the response HMRC will then either send a second letter asking for even more information, or they will write to inform the company that it is rejecting their R&D claim.

The format of the 1st and 2nd letters is pretty generic and some useful information on these can be found in our previous blogs – First Letter & Second Letter.

What happens next is either HMRC will write, usually after a long wait, to say that the R&D claim has been approved in full, or it will send out a 3rd letter informing the claiming company that it has made a pre-decision that either the entire R&D claim is invalid, or specific projects are being disallowed and inviting counterarguments if the company disagrees with this decision.

This may seem like a very reasonable approach, as the 2nd letter HMRC sent out requested a lot of information with regards to the project details and how they meet the BEIS (2004) guidelines in relation to R&D tax relief, which should mean that HMRC now has all of the information it needs to make a fair decision as to if the R&D claim is valid, or not.

We’ve reviewed several of these 3rd letters, some via the R&D advisor who compiled the claim and some directly from the claiming company, and they appear to follow a similar format.

Firstly, the caseworker offers a ‘thank you’ for providing the information requested in the 2nd letter and then will include something like:

“HMRC is a fact and evidence organisation. This means we cannot use any unsupported opinions or information in making decisions. The scope of a corporation tax enquiry is limited to establishing the facts of a case and applying HMRC’s policy to those facts.”

So far, all sounds very promising as the facts and evidence are exactly what decisions relating to the validity of an R&D claim should be based on, not speculation and conjecture, as that way madness lies.

Next, the caseworker will make some references to CIRD and say that either 100% of the claim is invalid or some of the projects are being disallowed, including the following:

“I know this will be very disappointing for you as you have clearly worked hard on the project which the company has undertaken. I have summarised the points at issue below with my view of the matter.”

Ok, still seems fair enough as the caseworker must have some valid reasons to reject either the entire claim or specific projects, especially as they mentioned above “we cannot use any unsupported opinions or information in making decisions” and the claiming company, and their competent professional(s), will have already provided lots of information in response to the 2nd letter.

So, now we come to the reasons for the project(s) being rejected and this is where HMRC appears to be steering away from what is fair and reasonable and into some, quite frankly, confusing and worrying waters.

The following are some real examples HMRC has given for disallowing projects included as part of an R&D claim:

“As part of my review of your claim, I have conducted open-source searches which have revealed that several manufacturers offered similar products that predate the commencement of your project.”

That’s it, nothing else. No mention of what products the caseworker found or what form these “open-source searches” took.

“During the course of my investigation, I was able to find similar concepts to that outlined for this project in use in a different field.”

Again, no mention of what concepts the caseworker found during their investigation and how similar they were to the technology the company was attempting to develop.

“From the online research I have conducted as part of this inquiry, it is apparent that the product already exists in the public domain. Therefore, what you are aiming to develop appears to be similar to what is already available on the market.”

Ok, so at least for this one the caseworker tells us it’s online research they have conducted, but again no other information to help ascertain if, in fact, the technology being developed does exist already, or if it just appears that way to a non-technical person doing a quick Google search.

It’s the repeated use of the word “similar” which is concerning, as we all know two things can appear similar but be very different.

For example, to the casual observer, two cars may appear “similar”, but the technology in a high end BMW would be more advanced than that you would find in an entry level Dacia.  However, using the caseworker’s logic, BMW would not have been able to claim R&D tax relief for the development of their adaptive LED headlight technology as a Google search would reveal that headlights already exist and they are “similar” to the new technology BMW is developing.

We also have to consider BEIS (11) which clearly states:

“If a particular advance in science or technology has already been made or attempted but details are not readily available (for example, if it is a trade secret), work to achieve such an advance can still be an advance in science or technology.”

Meaning that even if the caseworker found identical technology during their searches, not just similar, work to develop the same can still qualify as genuine R&D for tax relief purposes.

What does this mean for companies who still believe they have a valid claim?

This really depends on the company, the value of the claim and whatever else they have going on at the time.

A number of companies at this stage will simply give up, especially when their claim value is small and the extra work and stress in continuing to deal with the enquiry won’t make sense, or if they are working with an advisor who is charging additional fees to deal with the enquiry, it can reach a point where regardless of the outcome of the enquiry the claiming company will end up out of pocket.

There will also be companies who don’t really have a choice here as the longer an enquiry drags on, the higher the chances that the claiming company will be unable to fight it due to their competent professional leaving, lack of funds/company going under etc.

Those who wish to continue defending their claim could request that HMRC provides details of the “similar” technologies it has found where, if their claim is valid, they will be able to demonstrate the advance being sought by articulating a clear distinction between the “similar” technology and the technology they were attempting to develop.

If you have any questions on this blog or anything R&D related, please contact us at [email protected].

Posted: 16 Aug 2023