R&D HMRC Enquiries – an area of further focus?
After the Spring Statement was delivered on the 26th March, HMRC issued a consultation on Research and Development (R&D) tax relief advance clearances. Of interest within this document HMRC set out a flow chart explaining the process of their basic automated risk profiling checks which are applied to each claim to determine if it is immediately passed to the payments team or selected for ‘compliance intervention’. It has been apparent over the last couple of years that R&D HMRC enquiries have increased and this was borne out with consultation document also confirming that in 2023/24, 17% of submitted claims had been enquired into by HMRC.
HMRC remain convinced that there is substantial non compliance within submitted R&D claims and this consultation sits alongside other consultations issued on the same day addressing various penalties and sanctions for tax non compliance or late filings.
We know R&D tax relief is a valuable incentive for businesses investing in innovation, but as borne out in the statistics above, we have seen and heard from other tax professionals also working in this area that over the last few years HMRC have intensified their scrutiny of R&D claims. There is no doubt that the number of R&D claims that are being referred to enquiry stage is rising. Understanding the process and the possible outcomes can help businesses prepare and respond effectively.
What is an HMRC R&D Enquiry?
A HMRC R&D enquiry is an investigation into a business’s R&D tax relief claim to ensure it complies with the eligibility criteria. Enquiries can be triggered by variety of factors, the majority are random, although we are aware HMRC have specifically targeted smaller claims in the software arena, but can also be triggered by inconsistencies in the claim information or a lack of supporting evidence submitted.
What happens during the HMRC R&D Enquiry Process?
HMRC issue a letter notifying a business that their claim is subject to an investigation. This notification will contain details of the enquiry and request further information. HMRC may ask for additional details about the project, technical justifications, and financial records. Typically this will result in the exchange of a number of letters, unfortunately often HMRC will be reluctant to discuss the issues although we are seeing some change in this recently. Once HMRC have assessed the additional information supplied to them, they will communicate their decision.
The Possible Outcomes of an R&D HMRC Enquiry
Claim Approved – HMRC accepts the claim in full and processes the tax relief as submitted. However the company will still have incurred the time and expense of defending the claim.
Partial Adjustment – Some elements of the claim may be reduced or removed, impacting the final relief amount.
Full Rejection – HMRC can decide the claim is ineligible for the relief and it will be refused. If this happens then an independent review can be requested, which can often be a useful step to consider. If HMRC still deny the claim then the alternative dispute resolution process can be considered or ultimately a taxpayer can decide to take the claim to the tribunal.
Penalties & Repayments – If errors are found, businesses may need to repay claimed amounts and could face penalties for inaccuracies.
Our experienced team help clients submit R&D claims regularly. They understand how to prepare and respond to a R&D HMRC enquiries should they decide to investigate a claim. Our advice would be:
Keep detailed records of R&D activities, project reports, and financial data to support claims.
Speak to your advisor – R&D tax specialists can help businesses through the enquiry process and communicate effectively with HMRC.
Contact HMRC Promptly – Responding to requests as quickly as you are able can help to reduce the amount of time the enquiry takes and shows a willingness to cooperate.
If you receive a notification from HMRC for a R&D enquiry or if you have any questions about qualifying for R&D tax relief, please contact us.
