R&D tax crackdown deters genuine claims, CIOT warns

HMRC’s efforts to “get tough on abuse” of R&D tax relief have resulted in them rejecting legitimate claims and stone-walling other genuine claimants with a bureaucratic system that is driving them to give up on claims, the CIOT has warned. 

According to the taxation institute, it has shared with HMRC concerns around how it is conducting R&D enquiries into claims by SMEs, as it has led to “a breakdown of goodwill and trust between HMRC and taxpayers and their agents”.

In a letter to the director of wealthy and mid-sized business compliance at HMRC, the CIOT laid out its view that the ‘volume compliance’ approach that was adopted by HMRC in the latter part of 2022 does not work well for R&D tax relief claims. 

This is understood to be due to the “complex” nature of the relief and the technical consideration needed in ascertaining whether or not there has been a qualifying R&D project.  

Whereas historically conversations were an important mechanism through which R&D could be explained to HMRC, the volume compliance approach is based around frequent challenge and standardised letters with “little or no opportunity” for businesses and their advisers to explain the R&D activity they are engaged in. 

The CIOT believes that under the new approach “there is no direct engagement between the compliance team and the claimant, either in person or virtually”.

Ellen Milner, director of public policy at CIOT, said: “Abuse of R&D relief is a substantial problem, but in their efforts to tackle it, HMRC need to be careful not to throw the baby out with the bath water.

“We are receiving a large number of reports from our members about the difficulties being encountered by firms carrying out genuine research and development. We are also concerned that HMRC are attempting to inappropriately apply penalties in cases where they consider no R&D has taken place.” 

She added: “The result of this inflexible, confrontational approach is a breakdown of goodwill and trust between HMRC and taxpayers. The current approach is discouraging legitimate claims from SMEs, which is undermining the policy intention of encouraging R&D.”