What to expect from an HMRC Enquiry into your R&D Tax Relief claim

When you submit an R&D tax relief claim, there is a chance that HMRC might have some questions and have to initiate an enquiry to ensure the validity and accuracy of the claim.

Enquiries are a standard practice to maintain the tax system's integrity and prevent any potential abuse of the tax system and incentive schemes. R&D claims are no different, but it is a high-profile relief that has become under increased scrutiny recently.

R&D Tax Relief enquiries are on the rise

Recent statistics released by HMRC found that the government’s R&D Tax Relief scheme for SMEs was costing the treasury £6.6bn in 2020-21 and, without intervention, could rise to £9.5bn by 2027-28.

Following a random enquiry programme of 500 sampled cases, HMRC increased the estimated level of fraud and error in R&D claims to £1.13bn for 2020-21 (was £336m). Most of this is related to the SME scheme.

To improve the scheme's performance, reduce the frequency of errors, and tackle fraudulent claims, HMRC is investing heavily in their enquiry teams, with capacity increased to over 300 staff as of April 2023. They also launched a targeted R&D Anti-Abuse team in July 2022.

HMRC have also updated their compliance approach to R&D (17 July 2023), which will include better education and support for business to get it right first time, using sophisticated risking measures and working closely with Agents and advisors to raise standards and communications with HMRC.

Furthermore, changes have been made to the scheme to help combat fraud and error, including reducing the amount of SME relief and increasing reporting requirements.

• If you haven’t made a claim before or in the last 3 accounting periods, you will need to pre-notify HMRC of your intention to make a claim (for accounting periods beginning on or after 1 April 2023).
• There is also a new requirement to submit an “additional information” digital form for any R&D claims submitted on or after 8 August 2023.

You can read more about the changes to the R&D scheme in the UK in our blog.

What sort of issues might HMRC be looking for?

R&D tax relief claims can be very complicated, depending on the nature of the project on which you are claiming. The following are a handful of areas where issues commonly occur, which HMRC are going to be looking out for when claims are submitted.

• Claiming for projects that do not meet the BEIS definition of R&D
• Any R&D claim is submitted without an R&D Report or a proper breakdown of qualifying expenditure (prior to 8 August 2023 – see below).
• Inadequate explanation of how the project sought an advance or appreciable improvement in science or technology.
• Directors using their own “connected” company to perform sub-contracted R&D.
• Claiming excessive numbers of staff are conducting R&D without sufficient evidence.
• Poor or inadequate methodology in calculating the qualifying R&D costs in the project.
• Claims being made for overheads which do not qualify as consumables.
• Companies claiming under the SME scheme when they do not qualify.
• Special rules for sub-contracted expenditure not being applied.

As you can see, there is enormous scope for errors in an R&D tax relief claim. It is very important to check the validity of your claim before submission.

What happens if your R&D claim is investigated by HMRC?

If your claim catches the attention of the HMRC or is randomly selected for an enquiry, you'll receive an initial contact letter from them outlining the scope of the enquiry. This should be responded to promptly, including any requested information, to avoid any delays or further issues.

In an enquiry, you can then expect the following steps to take place. However, it is important to note that the full process and schedule of each enquiry can vary depending on the complexity of the claim or the seriousness of the suspected problem.

• Documentation review: HMRC will review the documents you included in your claim to assess how well it adheres to their rules.
• Additional information requested: If they do not feel you have provided all the information requested, they will ask for more information and often the questions will be specific and in relation to certain areas of the claim.
• Evaluation: When the required information is gathered, HMRC will review and evaluate your claim. If they find no problems, the enquiry will be closed (and if not already processed, it will be, and any refunds/tax credits paid). However, if issues are found, they will advise you what is needed to resolve the enquiry or may close the enquiry and consider if penalties are due.
• Appealing the decision: If you disagree with HMRC’s decision or suspect they have made an error, you have the right to appeal their decision, usually within 30 days of their decision. You can also ask for an independent review, Alternative Dispute Resolution (ADR) or ask for a Tax Tribunal to hear your case. For the latter two, you will require professional representation and in some cases tax lawyers, a costly matter.
  
  

Tips for making life easier if HMRC launches an enquiry

With the increased frequency of enquiries and the greater complexity of R&D Tax Relief rules, it is important to protect your business and ensure that your claims are fully compliant, with maximum supporting documentation to hand.

Here are some tips to ensure that you are protected from a potential enquiry.

• If your accountant who processes and submits your claim is a more general tax practitioner, then it can put a claim at more risk. We strongly recommend working with specialist R&D professionals who can ensure the claim complies meets HMRC’s criteria.
• If you conduct your own claims, it is important to have them sense checked by an expert before submission.
• Keep detailed records of the R&D project from the very start, including proof of why it qualifies as an R&D project, from hypothesis and technical feasibility, through the project lifecycle, testing and results.
• Make sure you are fully aware of the new rules and reporting requirements as of 8^th