Is there a penalty in getting your claim for R&D Tax Relief Wrong?

07 May 2021

At this time when many companies are looking for some additional cash, far more have been looking at R&D tax relief and being more open to consider whether their activities qualify as innovative enough to justify a claim.

This relief is extremely valuable given it can deliver a tax reduction, a tax repayment or in some cases a payment of a tax credit (cash) from HM Revenue & Customs (‘HMRC’).

The increase in claims and the cash challenges businesses are facing has put pressure on HMRC, and they have thankfully allocated more staff in an effort ensure the tax relief / tax repayment claims are processed quickly and cash is efficiently delivered to companies. However, at the same time HMRC is becoming more suspicious that many R&D claims are erroneously inflated or submitted for activities that do not meet the innovative test. There is back up for this in the consultation processes around R&D HMRC has recently progressed with the market.

Should an error be identified in a claim for R&D tax relief, HMRC can charge a penalty linked to the tax loss suffered by the Treasury. Where it is proven that reasonable care and attention has not been invested when preparing the claim, the penalty can be equal to the tax lost. The severity of the penalty is highest where it can be proven that an error in a claim is deliberate. By contrast if there is no intention behind the error, and your interaction with HMRC is open and effective, the penalty level can be managed, in some cases being reduced to nil.         

In the current climate where desperation may cause some companies to make erroneous or fraudulent claims there is increased noise in the media that HMRC intends to increase its review of R&D claims. As a result, we would recommend the following rules of thumb be followed when considering an R&D claim:

  • Ensure you are comfortable that each project where R&D is being claimed meets the innovation tests;
  • Ensure evidence is collated and advice from an experienced R&D practioner is sought to allow the claimed R&D position to be defended and penalties resisted;
  • Ensure evidence of your SME status is collated should a claim for R&D tax relief be made as an SME;
  • Identify the technological or scientific uncertainties that were tackled as part of your R&D work and ensure these are realistic / recognisable as genuine obstacles that were overcome; and
  • Ensue the right allocations of qualifying expenditure are included in the claim in accordance with specific R&D tax legislation.

In short make sure you prepare your claim with the relevant care and attention that HMRC will expect.

At AAB our Innovation Team is vastly experience in making claims for R&D tax relief for companies in a wide variety of sectors and the team has the right mix of tax technical skill, accounting expertise, past HMRC inspectors and industry knowledge. This provides our client’s peace of mind that their claims can be robustly defended if queried by HMRC.

If you would like any further information please contact Gregor McCallan or your usual AAB contact. 

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