HMRC does not publish its methodology for deciding which R&D tax credit claims to check, but in our experience the following are some common reasons:
- Being picked out as part of a regular, random checking process – it appears that random checks are done on any size and type of claim – we’ve just had one come up for a second year R&D claim by a start-up company, making a very modest R&D Tax Credit claim. HMRC does state in guidance information that they aim to looked at all regular R&D tax relief claimants at some point.
- An error being made on the corporation tax return – this is especially the case if the error results in the R&D Tax Credit claim being bigger than it should be. It usually leads to an instant and full Enquiry, even if it easy to explain the error. This type of errors can occur through accountants mixing up the corporation tax return (CT600) boxes for Small & Medium Enterprise R&D claims and RDEC claims (the latter being the large company scheme for companies with over 500 employees); or badly designed tax software creating an error that gets missed. For this reason we always insist on double checking our clients’ corporation tax returns to make sure the R&D claim boxes are correctly completed.
- There is something that stands out about the R&D claim – this can be anything from the costs look excessive, the company has a poor track record with HMRC compliance in general, the claim is large, some costs included do not qualify, HMRC wishes to check expenditure claimed has been incurred, to project descriptions that undermine rather than make the R&D case. Or simply that insufficient information was provided when the claim was initially submitted in a tax return.
Undertaking a through claims process each year is the best way to mitigate the risk of an adverse HMRC Enquiry, because the risk from a claim check is related to the quality of your most recently filed R&D Tax Credit claim. But an error in your most recent claim does mean HMRC can go back and look at other prior claim years. An enquiry is time consuming and claims involve making judgments. A sound process at the first attempt reduces the risk of a claim being checked and an error being discovered if it is checked.
If you are involved in a HMRC claim check or enquiry and are not an existing client we provide an Enquiry service. For existing clients full support through a check is part of our service. If you are thinking about claiming or would like an audit of past claims please get in touch. We offer a no obligation free assessment.