The Cash Flow Impact of an HMRC R&D Tax Compliance Check

By Alastair Hall, R&D Management

 

As an R&D advisor, I’ve encountered numerous CFOs and CEOs who assume their R&D tax claim process is fool-proof. Due to recent HMRC policy changes, combined with an increase in compliance checks, this assumption can have negative impacts to cashflow. Some rely on past experiences with different versions of HMRC, while others trust in their advanced technology. However, HMRC’s recent findings reveal that 36% of SME claims contain errors in their random enquiry program (MREP Results). Whether we agree or not, the House of Commons estimates that approximately 20% of claims undergo scrutiny, regardless of industry.

Let’s delve into the cash flow impact and broader consequences for companies, using the example of a loss-making tech SME that raises capital from external investors:

1. Immediate Cash Flow Delay: On average, a compliance check results in a nine to twelve-month delay in benefits. For many UK tech companies, this delay is a severe blow, as they often need to secure additional financing promptly.
2. Increased Capital Needs: While fundraising was easier in 2022, the landscape has changed. Investors are now more cautious, and the prolonged compliance process compounds the challenge. Some investors even shy away from companies under HMRC scrutiny.
3. Subsequent Claim Delays: Successfully defending the initial claim doesn’t end the impact. The subsequent R&D tax claim also faces delays. Submitting a claim during an ongoing compliance check triggers a second check, adding an average delay of nine months.
4. Continued Capital Raising Challenges: The prolonged R&D relief payment delay forces companies to seek additional capital. However, potential investors, wary of the 2024 landscape, perceive double delays in R&D payments as heightened risk.

When these factors converge, the real-world consequences become evident in:

• Delayed Investment
• Redundancies
• Administrative Burden

As an advisor, I’m frustrated by CEOs and CFOs who prioritise cost over quality consultancy. While most areas of the workforce are time poor, the ROI of proper filing is indisputable. If you have questions about avoiding compliance checks, feel free to reach out to FI Group.