Navigating an HMRC investigation into R&D Tax Credits: A guide for concerned SME directors

Introduction

As a director of a small to medium-sized enterprise (SME), the prospect of an HM Revenue & Customs (HMRC) investigation can be incredibly daunting, especially if it stems from a misguided attempt by a third party to claim Research and Development (R&D) tax credits.

• If you’ve been approached by a claims company promising substantial R&D tax credits, only to find out later that the claim was incorrect or fraudulent, it’s understandable to feel overwhelmed and worried about the potential consequences.
• However, with the right guidance and support, you can navigate this challenging situation and protect the future of your business.

Our R&D defence team at FWJ

Our team at FWJ are experts in defending R&D tax credit investigations. Our team includes

• Andy Lynch. Andy is an expert on a wide range of HMRC claims and before joining FWJ, he spent 18 years at HMRC in their special investigations team. His experience is unrivalled in all types of HMRC investigations including R&D claims.
• Phoebe Pexton. Phoebe specialises in R&D defence work, most recently obtaining a successful result for a lighting company being investigated by HMRC. Her delighted client commented as follows “Simply outstanding service! From the initial enquiry to the final submission, I have been thoroughly impressed with the advice and communication, depth of knowledge and turnaround time from this firm. Specific thanks must go to Phoebe Pexton for her attention to detail, care and dedication throughout”.
• Pembe Ramadan. Pembe previously worked as a solicitor at HMRC before joining FWJ. She has considerable experience in a wide range of tax related areas, including R&D claims.

Andy Lynch is outstanding. Dealt with an R&D tax query at a time of great stress for me due to a recent bereavement. Clear, calm, practical advice delivered with compassion and action. Quite simply heaven sent. I can’t recommend him highly enough

A client for whom we successfully assisted in a tax query

Take control quickly

If you’ve been approached by a claims company and suspect that the Corporation tax research and development R&D relief claim they filed on behalf of your SME was inaccurate or fraudulent, it’s crucial to take immediate action. HMRC takes claims of this nature seriously and may initiate an investigation to verify the legitimacy of the claim and assess any potential penalties.

Positive first steps

It is natural to feel overwhelmed when faced with an HMRC enquiry. But having dealt with many investigations for clients over the last 20 years, some simple early steps can almost always help. Here’s what you can do:

• Stay calm and seek professional advice. It might sound obvious, but giving this specialist subject to a firm of experts can immediately relieve the stress. Our team of tax dispute lawyers has a wide range of experience in R&D tax credit investigations.  We are happy to have a free initial call with you to find out the nature and extent of the problem you face.

• Gather documentation and keep it safe. Collect all relevant documents (including electronic files) related to the R&D tax credit claim, including communications with the claims company, financial records, project descriptions, and any other relevant information. Having these documents organised and ready will be essential when it comes to responding to the the investigation. Safeguarding the information is absolutely vital when it comes to mounting a successful defence.

• Cooperation with HMRC. If HMRC contacts you regarding the R&D tax credit investigation, the key is not to ignore them, but to cooperate as far as you are able. Being transparent and cooperative can demonstrate your willingness to resolve the situation and mitigate potential penalties. But we would only recommend doing this with expert legal advice. It is important that any evidence you put in response is properly drafted, answers the questions and doesn’t open you up to further investigation.

Consider your own situation – what has happened?

We come across a range of issues with SME’s who have dealt with claims companies. Do any of these sound familiar?

• Were you approached by agents who held themselves out as certified accountants with a “very good understanding of what can and can’t be claimed” and were “very confident” in the merits of the claims?

• Did they provide very little advice in relation to eligibility for relief and misrepresent criteria in promotional material?

• Did they misrepresent the basis of their commission, deceiving you into engaging their “tax specialists” on a no-win, no-fee basis?

• Did they take their fee out of any payout by HMRC regardless of whether the claim was rejected?

• Did they hand you over to another member of their ring to deal with HMRC enquiries, for whom an additional fee was payable?

• Have you experienced situations where there was no payout, yet they still took their fee from credits in the Company’s HMRC account, and then dropped off the radar when confronted?

If any of these sound familiar – you might have a problem. But our tax dispute team have come across all of the above situations and many more. And successfully resolved the issues for our clients.

How we can help you

Our team of experienced tax dispute lawyers specialises in assisting SME owners and directors facing HMRC investigations into R&D tax credits. Here’s how we can support you.

• Initial consultation and assessment. We’ll conduct a thorough review of your case to understand the specifics and assess the potential risks and options available to you.

• Representation and communication. We’ll serve as your representative in all communications with HMRC, ensuring that your rights are protected, and your responses are accurate and timely.

• Document review and preparation. We’ll meticulously review all relevant documentation, including the R&D tax credit claim and supporting materials, and assist you in preparing any additional information required by HMRC.

• Negotiation and resolution. Our goal is to resolve the investigation as efficiently and favourably as possible, whether through negotiation, settlement, or, if necessary, litigation.

Understanding potential consequences

If HMRC determines that the R&D tax credit claim was incorrect or fraudulent, there could be serious consequences for your SME, including:

• Repayment of tax credits. You may be required to repay any tax credits received as a result of the incorrect claim.

• Interest and penalties. HMRC may impose interest and financial penalties on the amount of tax credits overclaimed, depending on the severity of the error or fraud.

• Reputation damage. Incorrect or fraudulent claims can damage your SME’s reputation and erode trust with stakeholders, potentially impacting future business opportunities.

HMRC mean business – they want money back

According to HMRC’s 2022-2023 annual report, the HMRC remains “steadfast in its commitment to ensuring the integrity of the tax system and safeguarding public funds”. HMRC have indicated that they are training up staff to bring more R&D claims.

Their latest report highlights HMRC’s proactive measures to detect and address inaccuracies and fraudulent activities, particularly in areas such as R&D tax credits.

• Through robust investigations and collaboration with stakeholders, HMRC aims to “uphold compliance standards and hold accountable those who misuse the tax credit system”.
• This underscores the importance of accurate and transparent claims, as well as the need for SME directors to engage in responsible practices when pursuing tax incentives.
• The estimated overall level of error and fraud for R&D tax credit schemes for 2020 to 2021 was 16.7%, amounting to £1.13 billion. This is a significant increase from the previously published estimate of 3.6% (£336 million) for the same period.
• Specifically, the level of error and fraud in the SME scheme was 24.4% (£1.04 billion), while it was 3.6% (£90 million) for the RDEC (Research and Development Expenditure Credit) scheme. Given that the expenditure on R&D reliefs during the year was £6.8 billion, these figures underscore the importance of accuracy and compliance in R&D tax credit claims.

The upshot of all this is that HMRC are only now waking up to the fact that they waved through far too many incorrect or fraudulent HMRC claims – and a clear instruction has gone out to collect more money in. Caught up amidst the fraudulent claims will be lots of SME’s who have done nothing wrong – but will have to spend time demonstrating this fact.

Conclusion

Facing an HMRC investigation into an incorrect or fraudulent R&D tax credit claim can be a challenging experience, but you don’t have to navigate it alone. Our team of experienced tax dispute lawyers is here to guide you through the process, protect your rights, and help you achieve the best possible outcome for your SME. Don’t hesitate to reach out to us for expert assistance and support.

We can help you – free initial call

For expert advice and representation in HMRC investigations related to R&D tax credit claims, please get in touch with our team today. We are here to help you through every step of the process, ensuring a positive and constructive resolution.

Contact Andy Lynch, Phoebe Pexton or Pembe Ramadan for immediate help today.

Simply outstanding service!
From the initial enquiry to the final submission, I have been thoroughly impressed with the advice and communication, depth of knowledge and turnaround time from this firm. Specific thanks must go to Phoebe Pexton for her attention to detail, care and dedication throughout.

A client facing a R&D tax credit investigation