From 8 August 2023, all companies making an R&D claim are required to submit an additional information form (AIF) to HMRC in advance of filing their corporation tax return. Perhaps surprisingly, recent statistics released from HMRC confirmed that almost half of R&D claims received in the first four weeks following the introduction of the additional form did not include the required AIF and the claims were consequently invalid.
As a result, HMRC have begun to issue notices to companies and agents in instances where the R&D claims do not include the necessary AIF. These letters provide information on the necessary actions needed to make a valid R&D claim and are summarised below.
Before you claim
Companies must now submit an AIF before their corporation tax return is filed in order to support any R&D claim. If the AIF has been missed from the submission, there may be time to file an amended corporation tax return together with the AIF, however the information on the form and the return must match. Amendments must be made within 12 months of the filing deadline.
Completing corporation tax returns
In order for R&D claims to be successful, the corporation tax return (CT600) needs to include the following:
- An ‘X’ in box 657 which shows that the AIF has been sent
- An ‘X’ in box 656 which shows that a claim notification has been sent for accounting periods on or from 1 April 2023
- The supplementary page CT600L to be filled in if the company is claiming a payable credit or expenditure credit
- Computations for the relevant accounting period
- Accounts for the relevant accounting period
- Company bank account details
What happens next?
If the R&D claim has not met the necessary criteria, HMRC will remove the R&D claim from the company tax return. HMRC will send the company, and agent where authorised with HMRC, a CT620-COR notice confirming that they have made the R&D correction. This will also show any revised tax calculations that HMRC have made, which could have a significant and detrimental impact on cash flow where payable credits are rejected or corporation tax liabilities increase as a result of excluding the R&D claim.
What to do if you disagree with the CT620-COR notice
You cannot appeal against this notice. However, you can make representations to HMRC via the email address disclosed in their letter. In this representation, the company (or agent) would need to let HMRC know why they believe the notice is incorrect. This needs to be made within 90 days of the date of the notice. HMRC will then consider the representations and let you know of their decision. HMRC will either confirm the notice or withdraw it.
HMRC powers to amend corporation tax returns and charge penalties
Under longstanding provisions in the Finance Act 1998 (“FA98”), HMRC can enquire into a claim made in a recent tax return and amend the return upon closing the enquiry or use “discovery powers” to reject any relief which “is excessive” and recover any underpaid tax in the previous:
- four years where there was an “innocent error”;
- six years where was a “careless error”;
- twenty years where there was a “deliberate error”.
Additionally, HMRC officers reviewing R&D claims have just started to apply previously unused “Para 16” powers in FA98 to correct “obvious errors” in recent returns without the need to open a formal enquiry or even needing to have any prior discussion with the taxpayer. HMRC state they will now use these powers widely: “to remove the R&D claim where we have reason to believe it is incorrect, given the information available to us”.
Depending on the “behaviours involved” and the amount of mitigation granted, where errors have arisen and claims are rejected, HMRC can apply penalties of between 0% and 100% of the “Potential Lost Revenue” involved. This is in statute at Sch. 24 Finance Act 2007. Potential Lost Revenue will include not just any tax underpaid after a claim was previously allowed, but also any tax that would have been underpaid with a claim that was never allowed – as well as the expected future tax effect of any claim that merely increased as yet unused losses.
HMRC’s conclusions can be challenged or appealed. However, it is best to engage with HMRC to address any concerns HMRC might have cooperatively before any decisions become entrenched and are formalised. Cooperation and transparency is also vital in seeking to mitigate any potential penalties.
In the event companies identify errors in past R&D claims it is vital that they act without delay to make full voluntary disclosure of the errors to HMRC before they come under investigation. That will go a long way towards minimising any penalties as well as helping to persuade HMRC that the errors were not deliberate. On the other hand, any companies which might identify past innocent or careless errors HMRC are still in time to assess but might decide not to disclose them would then place themselves in the deliberate wrongdoing category – notwithstanding it wasn’t deliberate to start with. If directors are in any doubt – for instance, about whether HMRC would still be in time – do seek advice.
This post was written by Gemma Thake and Andrew Park, Tax Partners at Price Bailey. We have extensive experience with R&D tax relief and supporting clients with tax investigations. If you have any questions on the above or related to an HMRC enquiry, you can contact us using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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