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R&D Tax Reliefs are one of the most generous tax breaks currently available to UK companies, both large and small. The relief is generally worth around 25% of qualifying spend on R&D for SMEs. There is also an incentive available to larger companies, called RDEC.

The scale of the relief available to innovative businesses means lots of businesses submit claims to reduce their exposure to Corporation tax or cash in losses for R&D tax credits.

What is an HMRC R&D Tax Relief Enquiry?

An HMRC enquiry is a check of the R&D claim submission made by a company and that HMRC have queries on. The only way that they can ask questions is to open an enquiry.

These questions can result from benign or easy-to-rectify errors, a lack of information or in more serious cases, they may be in response to suspected fraud. As part of their enquiry, HMRC will attempt to gather additional information from the claimant about their claim, determining whether errors have been made, the nature of these errors, and whether additional monies are owed.

Why do R&D enquiries happen?

R&D Tax Reliefs were devised as a way of encouraging and rewarding businesses that invest in innovation for the benefit of science, technology, and the wider economy. Companies claim R&D Tax Relief through self-assessment, and HMRC enquiries function to ensure the scheme is not being abused.

HMRC have always enquired into R&D claims, but at a relatively low-level versus the number of claims being made. In recent years, HMRC has been facing a growing challenge presented by a large increase in the number of claimants, many that are perceived to be error strewn, both historic and current. As a result, they have started cracking down heavily on perceived abuse of both the SME and RDEC schemes.

Specialist R&D tax relief teams at HMRC have already been bolstered with an extra 100 inspectors. They are also continually introducing new strategies and technologies to enhance the efficiency of their enquiries.

Learn more about HMRC's R&D crackdown.

What might trigger an HMRC R&D enquiry?

HMRC deploys a process of risk-based selection for R&D enquiries, although there are also some random enquiries, meaning a perfectly robust and error-free claim may still be subject to an enquiry. HMRC have extended their processing times to allow them to review more claims and it would appear that software-based claims in particular are being targeted and the smaller size claims that may have “slipped under the radar” before this new approach.

There are some triggers which will raise eyebrows at HMRC if detected. These include:

  • Inconsistencies in a claim or submission of data that does not match HMRC’s own financial records about the business.
  • There are signs that a company is claiming for projects which do not meet the BEIS (Department for Business, Energy and Industrial Strategy) definition of R&D.
  • There may also be expenditure that falls outside of the qualifying categories. Even if a project itself qualifies, not all costs associated with the project necessarily will.
  • A change in circumstances of a business, such as a sudden or unexplained increase in spend on R&D activities.

What does an HMRC R&D enquiry look for?

If your business is submitting an R&D Tax Relief claim, whether independently, or with the help of an accountant, R&D boutique or other third party, there are several common errors that may trigger a response from HMRC following their enquiry.

  • Projects that do not meet the BEIS guidelines is an obvious one , as if the project does not qualify, then neither will any of the costs.
  • Claims that are submitted offer inadequate or incomplete information about how the project expenditure qualifies for the relief. This can include cost-breakdowns and other supporting documentation.
  • There are two separate schemes, one for SMEs and one for larger businesses (RDEC). The SME scheme is more generous, and companies claiming under the SME scheme when they do not qualify are likely to be penalised.
  • The company makes claims for overheads which do not qualify as consumables, as per the HMRC requirements.
  • Directors have used their own “connected” company to perform sub-contracted R&D.
  • The claim includes staffing costs for those who are not employees. Individuals must have an employment contract with the company.
  • A company receiving any form of Notified State Aid for a project cannot claim SME relief at any time for that same project, but they can make use of RDEC - HMRC will look to see if this has been treated correctly in the claim.
  • Companies can claim for certain costs paid to sub-contractors, but this is not the case for all sub-contract costs, and a reduced rate of relief is available.

R&D Tax Relief claim compliance checklist

Our team has put together the following checklist, which will help you determine how robust your R&D tax relief claim is. We strongly encourage you to review your claims, both past and future, against this compliance checklist.

Question If you answered "Yes" If you answered "No"
Are you aware of the HMRC (BEIS Guidelines) definition of qualifying R&D projects or at least had what projects qualify explained to you by your R&D advisor. Good. It is very important to understand what qualifies for the relief. Consider reviewing the guidelines next to the projects being claimed for, or ask your advisor to explain why projects meet the qualifying criteria.
Have you used an R&D specialist advisory firm (or an R&D specialist within your appointed accountants) Good. A qualified specialist will have a greater understanding of the legislative rules and requirements for a robust claim. We strongly consider seeking the advice of an R&D specialist instead of a generalist.
Do you submit a detailed R&D report to support the R&D claim made in your tax return? Good. Detailed documentation is extremely important for a robust claim. You may run into trouble if insufficient evidence or supporting information is submitted to HMRC. This will be mandatory from April 2023.
If you use a specialist advisory firm, are you given a copy of your claim before it is submitted? Good. As you are accountable for the claim, it is very important that you understand exactly what is being included, and whether it actually qualifies. Always request to see the full claim before it is submitted. A specialist in R&D should provide this as a standard practice.
Have the main technical specialists in your firm had input into the R&D report projects narrative? Good. Technical detail by those involved in a project is essential to a robust R&D tax relief claim. A potential problem, as it will be much harder to verify the technical accuracy of your claim narrative.
Have you applied a “sense” check to the level of R&D costs being claimed for? Good. If a claim value sounds too good to be true, it probably is. You should always sense check your claims to ensure you aren’t claiming more than you qualify for. This is a common and often costly error.
Do you use agency or freelancers to help with R&D projects? See below No action is necessary
(If you answered “yes” to the above) Have you checked if these costs actually qualify within the R&D rules? Good. Checking the eligibility status of the agency or freelance workers R&D costs are part of the claim process before the submission. We strongly recommend doing this to avoid claiming on costs which do not qualify. Self-employed workers costs are often not eligible in particular.
Have you received any grants or subsidies towards an R&D project? See below No action is necessary
(If you answered “yes” to the above) Have you considered that SME R&D relief may not be available for these projects Good. It is extremely important to understand the differences between the SME and RDEC schemes. Check urgently. One of the most common R&D tax relief claim errors is companies claiming for the more generous SME scheme when they actually fall under the RDEC scheme for larger companies.
Are any of the Directors recharging R&D costs to a connected or Personal Service Company? This is a common error in R&D tax relief claims. Directors cannot recharge their own personal costs from a connected company to perform sub-contracted R&D. Good. No action is necessary.
Do you feel adequately supported and advised by your professional advisor Good. As well as specialist knowledge, good communication between you and your R&D tax relief advisor is essential for avoiding errors. We recommend seeking a new advisor. Poor communication and support, make costly errors far more likely.

How will HMRC penalise errors in R&D Tax Relief claims?

HMRC’s crackdown on errors in R&D tax relief claims does not just cover detection of them. They are also enhancing their ability to enforce the rules, prevent fraud and recover underpaid tax.

HMRC’s Fraud Investigation Service Team have been issuing letters to companies they believe have made fraudulent R&D Tax Relief claims and are setting up a specialist Anti-Abuse team just for R&D claims.

If errors are ultimately found in an R&D claim, HMRC will seek to recover any underpaid tax and consider if a penalty is due. Penalties are based on behaviours and whether “reasonable care” was taken by the company making the claim. Claiming “ignorance” of the rules or even using a specialist R&D provider is not deemed to have taken “reasonable care”, so it can be difficult to avoid a penalty once HMRC have identified errors in the claim. These can range between 30% to 70% of the tax claim value.

If HMRC suspects the errors identified were deliberate attempts to abuse the scheme, they may refer the case to the Criminal Investigation team at HMRC, in addition to issuing financial penalties.

How can you prevent an R&D enquiry?

Due to the fact HMRC has the right to enquire into any claim it is impossible to guarantee your R&D Tax Relief claim will not be selected for a closer look. Instead, your focus should be on ensuring your claims are sufficiently robust to pass any inspections that may take place.

This means making sure your R&D Tax Relief claims are fully optimised within the legislative rules set out by HMRC. It is important to ensure your claim value is maximised, but it is even more important not to cut corners or push boundaries beyond what is eligible.

We strongly recommend ensuring your claims are prepared by fully qualified, experienced specialists (not generalists), who have vigorous quality assurance processes to ensure compliance.

Most accountants are subject to Professional Standards, but many R&D Tax Relief boutiques operate without regulation, meaning there is greater potential for exaggerated or incomplete claims being prepared. If a claim seems too good to be true, it probably is.

It is also important to note that accountability for the claim sits with the company that submits the claim, not the third party that made the claim on their behalf.

How to get your R&D Tax Relief claims reviewed

The Radius team at Shorts Chartered Accountants offers a free, no-obligation R&D Tax Relief claim review service. This review will be conducted by Darryl Hoy, a former HMRC R&D tax inspector, who has years of experience identifying potential problems with claims.

If you are concerned about the compliance or quality of a current or historic claim, we strongly encourage you to get in touch for a free review.


Scott Burkinshaw

Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.

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