If HMRC find an error in a tax credit claim that was made by an R&D (research and development) entity, they may charge a penalty corresponding to the tax loss incurred by the Exchequer. The severity of the penalty will be determined based on whether the claim’s preparation was done properly. If adequate care was taken, a penalty of ‘nil’ may be applied.
How severe are R&D tax credit penalties
The severity of HMRC tax credit penalties depend entirely on the circumstances relating to your R&D tax credit claim. If it is discovered by HMRC that an error was deliberately made or intentionally hidden from them, the penalty charged can be as much as 100% of the tax lost.
However, if you are responsive and forthcoming in providing information when an error is identified by HMRC, the penalty can be reduced to the extent that you co-operate with them. HMRC may even apply a penalty of ‘nil’ if it can be shown that you took adequate care in the preparation of your tax claim.
Furthermore, additional reductions and abatements can also be made for good behaviour with regard to the way you address errors found by HMRC. Good behaviour is assessed based on your sincerity and responsiveness in the event that errors are found.
Penalties can also be suspended while the reason for the tax claim error is being investigated by the R&D company in question. HMRC could, for example, ask the R&D company to improve their record keeping, and set a a review date.
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How to avoid R&D tax credit penalties
Remember that an HMRC enquiry will entail both the cost of the penalty itself as well as the time required for it to run its course. It is therefore important that you demonstrate to HMRC that you have paid due attention and taken care during the preparation of your claim.
The best way to achieve this is to ensure that your claim is robust and that you employed a sound methodology when you prepared it. In the event that any questions are raised by HMRC, it is also a good idea to have a meeting to discuss them. It is more likely that a positive outcome will be reached if you are open and responsive with regard to any errors or other issues identified by HMRC.
It is also important to understand that HMRC do not want to withhold your R&D tax credits, nor do they wish to discourage you from claiming them. The risk of penalties only applies to claims that were not prepared with the proper care and attention and is aimed at preventing inadequately prepared claims and intentional errors.
If you incorporate the advice provided in this article, the chances of being penalised by HMRC on your tax credit repayments can be kept to a minimum.
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