Research & Development Tax Relief | HMRC Voluntary Disclosure
Research & Development tax relief is designed to support and encourage companies engaged on innovative projects in science and technology. It is only available to companies chargeable to UK Corporation Tax. The relief may reduce liability for tax for some small or medium sized companies and the amount is calculated according to expenditure on research and development.
To qualify, the project engaged upon must seek, and be able to show, how science or technology may be advanced by resolving scientific or technological uncertainty.
Escalating abuse of the system arising from companies improperly claiming tax relief to which they are not entitled has resulted in an increase in HMRC investigations in an effort to clamp down on such abuse, whether occurring accidentally or deliberately.
HMRC estimates that inaccurate Research & Development (R&D) claims resulted in overpayments amounting to £1.3 billion in 2021-22.
HMRC recognises that the vast majority of taxpayers generally wish to pay the proper amount of tax falling due but may be hesitant to admit failures or errors for fear of the imposition of potential financial or other penalties.
With this in mind, on the 31 December 2024, HMRC launched a new online R&D Disclosure Facility. It is designed to make it easier for companies or their agents to disclose discrepancies in R&D claims, with the assurance that such penalties that may be imposed will usually be lower as the result of such voluntary disclosure.
This new facility is not available for situations where a company has deliberately submitted a fraudulent claim, where the alternative Contractual Disclosure Facility (CDF) should be used.
Tim Thompson of KANGS outlines the difference between these two differing facilities.
The R&D Disclosure Facility
This facility is available when:
- a company has claimed too much R&D tax relief,
- the time limit has passed and the relevant Claim cannot be rectified by amending the Tax Return,
- further Corporation Tax needs to be paid or overpaid tax credits paid back,
- the incorrect information was not provided deliberately.
This procedure is not available where the company:
- is within time to amend the Company Tax Return,
- deliberately provided the incorrect information knowing that it owed tax or had overclaimed R&D tax credits and chose not to inform HMRC or the figures on the tax return were wrong on submission.
An unprompted voluntary disclosure to HMRC does not guarantee any preferential terms but it may help mitigate any potential penalties payable, in respect of outstanding tax and will assist a company rectify any historical issue with HMRC.
Amongst other detail, the online form requires the company to:
- upload calculations of the R&D tax relief overclaimed,
- confirm how and why the inaccuracy arose,
- complete a ‘Letter of Offer’ in an HMRC standard format, which will form part of a contractual settlement with HMRC with the intent to rectify the issue,
Following submission of the online form, HMRC will:
- issue an ‘Acceptance Letter,’ which confirms the settlement or
- submit further questions. Upon satisfactory review, a letter of acceptance will be issued.
- within fifteen days of submission, provide a payment reference number enabling payment of the outstanding tax.
The R&D Contractual Disclosure Facility
If a company wishes to make a disclosure in respect of deliberate behaviour which has caused a loss to HMRC in respect of tax, the Contractual Disclosure Facility (CDF) should be adopted. This mechanism implements Code of Practice 9 which enables HMRC to reach civil settlements for tax fraud. If the process is not adhered to, HMRC reserves the right to commence a criminal investigation.
Before 1 January 2025, R&D tax relief did not fall for consideration within the CDF.
Deliberate behaviour is that which arises when a company knew that it owed tax but chose not to disclose it, or it knew the figures on its tax return were wrong when it was submitted.
The CDF is a contract between HMRC and the taxpayer in which HMRC commits that if the taxpayer fulfils all aspects of the contract, it will not prosecute the taxpayer for the disclosed fraud. The CDF is the only way to make a disclosure that receives this assurance.
How Can We Help?
Any company which is concerned as to the accuracy of its R&D claim, or indeed, any other tax return, should seek immediate specialist advice.
Engagement in a Contractual Disclosure Facility should not even be considered until experienced professional advice has been obtained as it involves an immediate admittance of involvement in tax fraud. HMRC holds the power to refuse to engage in a CDF and pursue a criminal prosecution.
Whilst all forms of tax dispute are inevitably complicated, those relating to R&D relief schemes can be particularly demanding given their unique prevailing and complicated requirements.
The team at KANGS offers many years’ experience handling disputes of every nature involving HMRC and would be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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