Why Does HMRC Initiate R&D Tax Credit Enquiries?

Enquiry rates have risen due to a surge in claims and compliance concerns. HMRC aims to prevent abuse and ensure genuine R&D activities receive support. Common triggers for an R&D tax credits enquiry include claims for ineligible costs, claims for ineligible projects, a lack of documentation, or unusually high expenditure compared to industry norms. In recent years, HMRC has added a sizeable number of new staff to its R&D team, reflecting its commitment to robust risk assessment. While HMRC does not publish its enquiry rate, businesses should be aware that a proportion of claims are selected for further review each year. 

The Advance Assurance Process for Small Companies

For smaller companies making their first R&D relief claims, HMRC offers an advance assurance process. Once HMRC accepts a company's application, R&D tax relief claims for the first three accounting periods are usually accepted without further enquiries. This process is only available to companies that have not previously claimed R&D tax relief and that have a turnover below £2m and fewer than 50 employees. The stated purpose is to enable small companies to focus on their business rather than their R&D tax claim. This initiative aims to make the process smoother and less burdensome for eligible businesses.

What Happens During an HMRC R&D Tax Enquiry?

For most businesses, after submitting a claim, the next stage is receiving the benefit of R&D tax relief. However, some claims will be selected for further review. When an enquiry is opened, HMRC contacts the claimant—usually by letter—outlining specific areas for clarification. Businesses may need to provide technical reports, financial breakdowns, and evidence of R&D activities. The process can take weeks or months, depending on claim complexity and information quality.

 

How to Respond to an HMRC R&D Tax Credit Enquiry

Preparation is key. Ensure your claim is well-documented, with clear project descriptions, qualifying activities, and accurate costings. Engaging with R&D tax specialists can help you navigate the process, provide technical explanations, and liaise with HMRC to resolve queries efficiently. A good adviser will be aware of current HMRC practice. When working with an adviser, you should expect that they have requested sufficient supporting detail during the claims process to swiftly address any point raised during an HMRC R&D enquiry. If an adviser is managing the enquiry process, they should be responsive, constructive, and transparent to resolve matters to HMRC's and the client's satisfaction as quickly as possible. 

 

Best Practices for Avoiding R&D Tax Enquiries

  • Maintain comprehensive records of all R&D activities and costs.
  • Ensure compliance with relevant guidelines and eligibility criteria.
  • Submit detailed technical justifications alongside financial claims.
  • Consider a pre-submission review by an R&D tax credit expert. 

Conclusion

As HMRC tightens oversight of R&D tax credits, understanding the enquiry process and advance assurance options is essential for businesses seeking to benefit from this valuable incentive. By preparing robust claims and responding proactively, companies can safeguard their innovation funding and maintain peace of mind throughout the process.


Next step: If you'd like an expert review of your current or past R&D claims, please get in touch.