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HMRC are being warned that its research and development (R&D) tax relief crackdown is resulting in many legitimate claims being rejected.

After hearing their member’s concerns about how HMRC are conducting R&D enquiries into claims by small and medium sized businesses, the Chartered Institute of Taxation (CIOT) has warned the tax department that this 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 set out its belief that the ‘volume compliance’ approach adopted by HMRC since the latter part of 2022 does not work well for R&D tax relief claims

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

The CIOT say 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.

Ellen Milner, CIOT Director of Public Policy, commented, “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.

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“We are receiving a large number of reports from our members about the difficulties being encountered by firms carrying out genuine research and development. Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so. Those businesses that do seek to challenge HMRC’s rejections seem to meet a brick wall, finding it very difficult to get a hearing for their case.

“We are also concerned that HMRC are attempting to inappropriately apply penalties in cases where they consider no R&D has taken place. For example we are aware of a number of cases where they have asserted that a failure to consult them in advance, instead relying on professional advice, constitutes carelessness. This is not in line with the established law around penalties, or with HMRC’s own guidance.

“The result of this inflexible, confrontational approach is a breakdown of goodwill and trust between HMRC and taxpayers and their agents and a lack of faith in the R&D tax relief regime being able to deliver for SMEs. The current approach is discouraging legitimate claims from SMEs, which is undermining the policy intention of encouraging R&D.”

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