HMRC’s R&D Crackdown: Should I Be Worried?

Lewis Songaila

Read • 4 min

Pre-Seed
Seed
Series A
Series B

The number of enquiries into R&D Tax claims is at a record high. Here’s what this means for you and how to protect your company from trouble with HMRC.

HMRC is on the warpath.

The cost of error and fraud in R&D Tax claims is off the charts, forcing the tax authority to intensify its compliance efforts.

A host of new countermeasures have come into force, including an eye-watering 1900% increase in enquiries: lengthy investigations exploring whether you are eligible for relief.

The tax authority has cast a wide net, ensnaring both legitimate and illegitimate claimants. Some of HMRC’s measures are so heavy-handed that one leading tax body said it may be guilty of an “abuse of power”.[1]

If you’re planning to claim R&D Tax Relief, here’s what you need to know about HMRC’s new, high-stakes compliance environment and what you can do to protect yourself.

What’s happening with HMRC?

In 2023, HMRC revealed that error and fraud in R&D Tax claims was costing more than £1 billion a year.[2]

In response, the tax authority embarked on a compliance crackdown, including an enormous, 20-fold increase in the number of compliance checks, commonly known as enquiries.

Enquiries can be hugely time-consuming for your business, requiring your senior people to prepare and share detailed evidence of your eligibility with HMRC’s inspectors. These investigations usually last several months, though they can take years to resolve.

On top of increasing the number of enquiries, HMRC has:

Established a new anti-abuse unit
Doubled the number of tax professionals working on compliance
Worked to identify and penalise R&D Tax consultants that promote non-compliance

The crackdown has successfully reduced non-compliance by almost 50%. However, it has also damaged trust in HMRC and deterred eligible companies from claiming R&D Tax Relief, undermining the very purpose of the scheme.[3]

What happens during an enquiry?

Each enquiry is different (insert saccharine snowflake analogy here). However, they generally involve some combination of the following elements:

A letter from an HMRC tax inspector with a list of questions about your development work. This is how all enquiries start.
Your written response to HMRC’s questions, which must be provided within 30 days of the date HMRC’s letter was produced
Follow-up letters from HMRC containing additional questions
HMRC’s inspectors interviewing the senior financial and technical people involved in your claim
Escalation to Alternative Dispute Resolution (ADR) if your investigation can’t be resolved during the regular enquiry process
A tribunal, held only in the most extreme cases

The alarming disparity in R&D Tax enquiries

How enquiries are handled depends heavily on which HMRC department is assigned to it.

The CIOT found that enquiries overseen by the Individual and Small Business Compliance unit (ISBC are much more likely to be wholly or partly rejected. In contrast, compliance checks undertaken by the Wealthy and Mid-sized Business Compliance unit (WMBC) are more likely to be accepted in full.

One reason for this discrepancy is that the ISBC is relatively new to processing R&D Tax Relief claims and doesn’t yet have a good grasp of what does and doesn’t qualify. Meanwhile, the WMBC has been processing R&D Tax Relief claims for many years.

The ISBC’s handling of investigations appears to be improving. Still, the disparity between the two units shows that enquiries pose a real risk even to companies who are eligible for relief.

What can I do to protect my company from an enquiry?

Clearly, enquiries are bad news. And the risk of facing one has never been higher. However, there are things you can do in this heightened compliance environment to reduce your chances of a resource-draining investigation. [4]

Don’t take risks

HMRC’s inspectors have their eyes peeled for anything that looks remotely non-compliant. Only include costs and projects in your claim that align with the scheme’s eligibility criteria.

Prove your eligibility

To claim relief you’ll have to submit an additional information form (AIF), providing HMRC with a host of financial and technical data about your development work. This is your opportunity to prove that your R&D qualifies for tax relief.

Avoid or explain jargon

If you have to use specialist terminology, make sure you explain what it means. Otherwise, your inspector - who mostly likely won’t have a technical background - may think you’re trying to hide non-qualifying work under a shroud of buzzwords and jargon.

Use the terms in the DSIT guidelines

The guidelines governing the scheme use specific terminology like ‘uncertainty’ and ‘competent professional’. Discussing your R&D in these terms will make it much easier for your inspector to see that your work is eligible for relief.

Work with a compliance-focused R&D Tax consultancy

They will know how to structure your claim to prove your eligibility and reduce your chances of an enquiry. Reputable providers will also offer free Enquiry Defence, minimising the impact of an investigation should you encounter one.

Key takeaways🔗

To recap. HMRC investigations are at an all-time high. Even if your company, projects, and costs are all eligible for relief, your claim may still face an investigation.

The chasm in enquiry handling between the WMBC and ISBC means that coming out of your investigation with your claim intact is by no means guaranteed.

The best way to avoid an enquiry is to take a compliance-first approach. This includes only claiming for costs and projects that you are certain qualify for relief and demonstrating your eligibility in the additional information form.