Enquiries into R&D tax claims: an overview

R&D tax relief has existed as a powerful incentive since 2000. With the number of claims increasing steadily in volume since its inception, HMRC has required more mechanisms to check claims for error and fraud. 

In 2021, ONS BERD statistics suggested a significant volume of error and fraud. This dramatically changed HMRC’s approach towards non-compliance and influenced where we are today. 

As a claimant, you are now more likely to find yourself facing an enquiry regardless of how diligently you prepared or past success. Companies with legitimate claims may face an enquiry owing to the random nature of the compliance process or through simply having a high-risk Standard Industry Classification or SIC code (used by Companies House to categorise companies according to the type of economic activity they undertake). 

So, if you’re facing an enquiry, it’s essential that you don’t ignore it and take immediate action. In this essential read, we look at the increased likelihood of enquiry; the different types and what to expect from them; and how ForrestBrown can support you. 

What is an HMRC R&D tax enquiry?

An R&D tax enquiry is a process through which HMRC asks for more information and clarification on your R&D claim. As discussed below, some R&D claims are enquired into based on their SIC code, whereas other claims are selected at random by HMRC or via targeted risk assessment.  

In 2006, HMRC set up several specialist R&D units to deal with all R&D claims on a geographical basis except for those claims in Large Business (LB) offices – although the latter would sometimes be handled with support from the R&D units. Over time, the R&D units became one large R&D specialist unit dealing with claims on a national basis under Wealthy & Mid-sized Business Compliance (WMBC). 

Today, it has two specific R&D units of dedicated compliance workers – WMBC and Individuals and Small Business Compliance (ISBC) , – plus its Large Business unit. The enquiry experience is different depending on the unit dealing with the case and the reason for the enquiry.  

An enquiry means that sometimes HMRC will enquire first and pay later (or not at all if the claim is rejected), and sometimes it will pay first, and enquire second. The latter is more common than it used to be owing to the volume compliance approach adopted by ISBC.

It is always worth remembering that a processed claim does not mean that HMRC has “approved” the R&D. 

Other HMRC compliance efforts

Enquiries are just one route for HMRC. There are other compliance activities such as checks undertaken by HMRC’s Fraud Investigation Service and letters – the so-called “nudge letters”.

How many enquiries are raised?

HMRC enquiries are more common due to increased resources, ISBC’s volume compliance approach and an even greater focus on error and fraud. You need to be prepared for a potential enquiry regardless of the quality of your claim or because previous claims have been successful. 

On 14 December 2023, HMRC chief Jim Harra provided oral evidence to the House of Commons Committee of Public Accounts in which he stated that 20% of all R&D claims were being checked. 

“We have increased our coverage in terms of compliance checks from around 1% of claims to now over 20%. It is unsurprising that people are feeling that [increase in compliance activity]. It is also the case that, in the past, we have had limited information on claims, which has meant it has been quite challenging for us to risk-assess them and make sure we are picking up the right cases. 

Some of the reforms that have been brought in to give us additional information relating to claims are intended to improve our risk assessment. Hopefully, fewer people who are genuine claimants will get caught up in our compliance activity in the future, as that comes in.”

With HMRC now checking substantially more claims than the previous 1%, the change in approach and impact is significant. To put this into context, based on HMRC’s October 2024 statistics, the enquiry rate was 17% in 2023/24, equating to compliance checks on 9,700 of the total 61,000 R&D claims received. This number compared to 90,000 claims received in 2022/23, representing a 21% year-on-year decrease. The introduction of pre-notification and the additional information form is not reflected in these statistics. Therefore, the number of claims may continue to fall, which could prompt further changes in HMRC’s compliance approach. 

Read about the National Audit Office’s findings on HMRC’s use of data to inform compliance actions or find out more about the latest BERD statistics.

Why do HMRC open R&D tax credit enquiries?

Let’s first address why HMRC has a compliance function before moving on to look at why they might enquire into your claim.  

HMRC has a responsibility to ensure the proper distribution of government funds through the R&D tax incentives – it is taxpayers’ money after all. It therefore needs to make sure that errors and abuse are kept to an absolute minimum and legitimate businesses are supported.  

Concerns around error and fraud (estimated to be over £1bn in 2021/22) saw HMRC’s R&D compliance activities increase significantly, heralding a new era for R&D tax relief. This shift in approach resulted in a raft of changes, designed to address the issue of non-compliance.  

Now let’s look at the reasons why HMRC might raise an enquiry into your claim.  

HMRC has always carried out checks on a proportion of R&D claims submitted each year. In recent years, the introduction of new compliance resources means the frequency of these checks is increasing.

Checks can be triggered by random sampling or a specific risk assessment approach. The random selection programme is designed to improve the data HMRC has on error and fraud, and ensures that future compliance checks are well targeted.

Alongside the random sampling approach adopted by ISBC, HMRC also targets certain sectors or types of companies based on their SIC code. The list of targeted SIC codes is not published by HMRC, to prevent businesses from changing codes to avoid scrutiny.

We’re now in an era where your focus should not be on taking measures to avoid an enquiry – this is not possible – but on being prepared for one. Just because you’re diligent, doesn’t mean HMRC won’t come knocking. 

These are other common reasons why HMRC might raise an enquiry into a claim: 

• HMRC believes it has found an inconsistency. This could be something in your R&D claim that does not reconcile with other data that HMRC holds about your business.  

• HMRC is fact-finding following a change in your circumstances, such as a significant increase in the amount of R&D expenditure you have identified, which isn’t explained in your supporting information. If you amend an existing R&D claim to increase the value, HMRC may want to investigate why that’s happened. 

• You have submitted information in the Additional Information Form that highlights a potential inconsistency. Equally, if you have submitted the AIF without the required level of information, this could trigger an enquiry, or HMRC could choose to deny the claim without an enquiry because the submission requirements have not been met, for example, by stating that you have three projects, but only presenting detail on two. 

• HMRC has wider questions about your tax return. Even if unrelated to R&D, it is common for your R&D claim to be checked at the same time.  

Which sectors are more at risk?

HMRC’s October statistics suggest that certain sectors may produce a higher number of non-compliant claims, providing a focus for HMRC’s compliance efforts. In 2021/22, for example, of the total number of claims received from the accommodation/catering sector, only 16% of claims in MREP were found to be compliant.

There are also particular sectors or businesses where technological R&D is less common, or where HMRC has received a high volume of spurious R&D claims. Or those that are more likely to be doing customer-focussed R&D and thus impacted by the changes in interpretation of subsidised expenditure.

Reasons for rejecting your claim without an enquiry

HMRC may reject your claim outright. This could be because you needed to notify for the period, but didn’t or missed the deadline, or you didn’t file an AIF, or filed your AIF and tax return in the wrong order, or you didn’t meet all AIF requirements within your filing.  

In each of these cases, HMRC will issue a correction notice removing your R&D claim rather than opening an enquiry. In some of them, you may be in time to correct the error and re-submit, but if a statutory deadline has passed, it’s unlikely that you’ll be able to remedy the situation. 

Types of R&D tax enquiry and other dispute resolution processes – what to expect

HMRC now has different units with dedicated R&D compliance workers. Depending on which unit enquires into your claim, your experience of an enquiry will be different.

Individuals and Small Business Compliance (ISBC)

Since mid-2022, R&D enquiries have been run by HMRC’s Campaigns and Projects team (part of ISBC), which operates a volume compliance approach. It is this team and approach which has enabled HMRC to dramatically increase the percentage of claims facing compliance checks in a short period of time.

ISBC enquiry process

The ISBC approach is entirely desktop-based and follows a structured workflow. It offers a streamlined approach to enquiries, where speed is of the essence. In prioritising speed and “efficiency”, there are occasions where the safeguards around using the law correctly have been overlooked.  

There are concerns of a systemic issue around training, where the same misinterpretations of the law are communicated across multiple cases. It is perhaps one of the consequences of introducing a new large team and providing training at scale. To put this into context, the number of caseworkers running enquiries into R&D claims has increased from 100 people in 2020/21 to over 500 today. This has led to some businesses with valid R&D having a bad experience. Other genuine claimants have lost their R&D claims or been put off making a claim for relief in the future. 

You can read more of our thoughts on the claim rejections in Tax.org.

Wealthy and Mid-sized Business Compliance (WMBC)

There is a specialist R&D team within WMBC too. Companies are likely to be selected via random sampling and, as the enquiry progresses, it will tend to address particular risks that the caseworker has identified in the R&D claim, and often includes a teleconference call to discuss the claim. The WMBC has been the primary unit responsible for enquiries for over twenty years.  

Large Business (LB) enquiries

R&D enquiries for large business customers will often involve an R&D specialist, who will work alongside the company’s Customer Compliance Managers (CCMs) and direct tax specialist.

LB enquiry process

For LB customers with a CCM, they should expect their CCM to lead the process. The process will be highly collaborative between the CCM, HMRC tax specialist, company and agent. It will likely include a detailed timeline of how the enquiry will be carried out and there is scope at all points of the enquiry to discuss the most appropriate approach to the response. The CCM should facilitate the company having positive discourse and engagement with HMRC.

WMBC & LB-focused enquiries

When WMBC or LB units open an R&D tax enquiry you are likely to go through the steps outlined below, although the details and timeframes will vary considerably depending on your case.  

It’s important to take a positive and cooperative attitude towards HMRC during an enquiry. Your willingness to provide further information in any correspondence or meetings can make a material difference to the outcome. 

• The first stage of an enquiry will always be a letter from HMRC saying that they are conducting a compliance check (i.e. opening an enquiry) into your R&D tax claim. This letter is likely to include some helpsheets, quote the relevant tax legislation and should include a request from HMRC for specific additional information about your R&D claim. Occasionally the request will be more generic and not refer to the information already submitted.
  
  This letter will set a deadline by which the information is requested, typically 30 days from the date of the letter (so you’ll often have less time than this once you’ve received the letter by post). It is possible to ask for more time if you need it, but you or your agent will need to do this in good time. Many companies underestimate the time needed to prepare a response, resulting in missed deadlines.

• In response to this request, you will need to collect the relevant information and documentation, and liaise with the HMRC case worker dealing with your case. If you are a ForrestBrown client, we can handle this for you, working with your competent professional(s) and finance team where we need any additional detail. A separate authorisation must be set up to allow your agent to communicate with HMRC on your behalf, even if they supported you to prepare the R&D claim under enquiry.   

• It is important to collate all the information requested into a response to HMRC, taking care to ensure that the case worker can follow your response. Common errors in HMRC enquiries include not answering all of HMRC’s questions, not articulating clearly enough why the projects are R&D projects, or providing so much unordered additional information that the HMRC case worker cannot clearly understand it. If you are providing additional supporting information, you should clearly refer to these within your letter, indicating what each appendix is providing to HMRC. 

Once you have responded, you can expect the remaining stages of a typical enquiry to feature further exchanges of correspondence and a call between HMRC and the competent professional(s) in which the projects (or a representative sample of them) are discussed.  

Regardless of how many rounds of correspondence an enquiry takes, the first step for any business utilising our enquiry support service is to understand the details of the case. We want to find out the quality of the R&D and establish trust with you. Our expertise spans technical tax and legal knowledge, alongside insights from a former HMRC inspector. Our sector specialists also help to assess the substance of your R&D and whether it meets the guidelines for R&D for tax purposes. Our experience means we can provide an honest assessment of your position and an overview of what can and can’t be done.

Outcomes

What happens next depends on your case. HMRC may close the enquiry if the case worker is satisfied that you’ve answered all their questions. If this happens, you’ll receive a closure notice and any amounts due to you will be processed.  

It is more likely that you may receive another letter with some further questions. If this happens, it is wise to have a strategy for resolving your enquiry, to protect you and your team’s time, as well as the value of your R&D claim. You should account for your enquiry being resolved over multiple rounds of correspondence with HMRC. 

It is common in R&D enquiries run by WMBC or LB (but not ISBC) for HMRC to request a call with your competent professional(s) to discuss your R&D projects, so this might be the immediate next step or occur after a few rounds of correspondence. Ensuring the right people from your business attend this call and are prepared for the type of questions HMRC might ask is important. Your agent can attend this call as well. 

At ForrestBrown, we recognise the importance of the call with HMRC and work with a company’s competent professional to ensure that they are well prepared for it and are able to explain their R&D thoroughly and in accessible language. We draw on the expertise of our multi-disciplinary team, which includes former HMRC inspector, Mark Andrew, who can share insights on what to expect from the call.

There are several possible outcomes to an R&D tax credit enquiry – we dive into them in detail in our What is the likely outcome of HMRC enquiry? KnowledgeBank article. The outcome depends largely but not exclusively on the quality of your claim and the nature of the questions raised by HMRC. For example, a well-prepared claim with a clear and robust methodology for identifying and apportioning the R&D activities, will have a higher likelihood of being agreed. There are notable exceptions to this – such as with our client, Quinn, where a well prepared and supported claim wasn’t accepted without taking the case to Tribunal.

Once the requested information has been provided and any outstanding questions resolved, there are three initial outcomes: 

• HMRC will accept the original submission; 

• HMRC will suggest an adjustment to the value of the claim; or 

• HMRC will continue the enquiry and further meetings and discussions will be held until resolution. 

If issues remain and discrepancies are found, your claim could be reduced or rejected and penalties could be imposed. HMRC has the power to impose penalties of 0-100% of your claim value, depending on its conclusions regarding the behaviour that caused the error to occur. HMRC can conclude that the mistake was made despite reasonable care, due to carelessness or deliberate behaviour. Your cooperation and responsiveness during an enquiry can also influence the penalty assessment. If HMRC is concerned that the error is systematic and would have occurred in prior claim years (even those outside the enquiry window), it may also investigate previous claims that have already been paid out; this is known as discovery assessment. 

Although HMRC has a compliance team dedicated to R&D tax relief, how you deal with an enquiry into your R&D tax credit claim may affect your overall relationship with HMRC (and vice versa). For example, if HMRC finds during the enquiry that your records are not in good order, they may wish to check that you are on top of record-keeping for other taxes or aspects of your corporation tax return. 

What happens next – post-enquiry processes

There are various strategies available to break an enquiry deadlock and push towards a desired outcome. We explore these in detail in our R&D tax dispute resolution blog.

Alternative dispute resolution (ADR)

ADR is a mediation service offered by HMRC to resolve tax disputes. It is a good way to re-establish communication and facilitate compromise, with the help of a skilled mediator. It’s a viable option at any stage of an enquiry (including post-decision, except for when Statutory Review has been offered) and it doesn’t affect your right to appeal. 

ForrestBrown recommended ADR to a company who’d been in a stalemate with HMRC for over two years. After one session, an acceptable resolution was reached for all parties. For companies in a stalemate with ISBC, this will likely be the first point at which a conversation with HMRC is able to be held regarding your R&D activities.

Requesting a closure notice

Sometimes it makes sense to draw an enquiry to a close in order to obtain an appealable decision. This can be done by requesting a closure notice but there are numerous considerations to this route.

Appeal

At the closure of an enquiry, the business will have 30 days from the date of the letter to appeal to HMRC in writing. This will then be reviewed by the compliance team and a response provided.

Independent statutory reviews

On receipt of the appeal response, if the company is still in disagreement with HMRC’s conclusions, it may accept HMRC’s offer of Statutory Review. This is the last point a business has prior to needing to appeal to Tax Tribunal if the review is unsuccessful.  

Tax Tribunal

Once other strategies have been considered and/or exhausted, the company claiming R&D has the statutory right to appeal to the First-tier (Tax) Tribunal. At ForrestBrown, we understand the Tribunal process and in 2021, we secured one of the first R&D Tribunal wins against HMRC on a technical point of law in Quinn (London) Ltd v HMRC – a First-tier (Tax) Tribunal decision concerning the interpretation of subsidised R&D expenditure. With a multi-skilled team comprising a former HMRC inspector, sector specialists and lawyers, we can assemble a highly qualified team to make your case.  

View our case commentary on key tribunal decisions. 

What to do if you are facing an enquiry?

When facing an enquiry, it’s important to act quickly, review all the questions and start the evidence-gathering process. You should also get expert support so that you can focus your efforts in the right areas. ForrestBrown have significant experience supporting businesses through R&D enquiries and tax disputes. 

Any correspondence from HMRC around non-compliance needs to be treated with seriousness. Too many companies ignore enquiry letters, or leave acting until too near the deadline, underestimating the level of information they need to provide, which causes problems further down the line.

How FB Consulting can help you

ForrestBrown prepare R&D claims using a multi-disciplinary team which includes chartered tax advisers, accountants and industry-experienced technical specialists, as well as an ex-HMRC inspector.  

So, if you’re an existing ForrestBrown customer, you can be confident that your claim has been reviewed thoroughly via a rigorous quality assurance process that integrates into each stage of your claim. This robust approach provides confidence that your claim will stand you in good stead during an enquiry, should one occur. 

Once ForrestBrown has assessed the claim and supported the business in understanding its position, risks and next steps, we can then work with your team to prepare a response for the enquiry. At this stage, we will pick up the communication with HMRC. 

We’re experienced in liaising with HMRC to reach a resolution. Our experience means we have a good understanding of exactly what HMRC are looking for and what they are asking. We will coordinate the collection of all the relevant information they need. 

When it comes to negotiation, it is essential to have an adviser who is experienced at enquiry settlements. Our understanding of HMRC and wider experience with dispute resolution will help ensure a mutually acceptable outcome is reached.  

Our exact approach will be based on our review of the case and discussion with you, in order to determine the best course of action for your business. We’ll also look forward, helping you to create and implement best-practice processes and record-keeping measures for your unique business needs.

How long does an enquiry last?

Depending on the complexity of the claim, an enquiry will typically take between six to 12 months to reach closure. There are usually a minimum of three rounds of correspondence, which take place in writing and adopt the form of an opening letter, reply, follow up questions, reply and decision. However, there could be multiple rounds of correspondence between the initial response and decision. There are at least 30 days between each response, and additional information may be requested, adding months to the timeframe. It’s worth keeping in mind too that HMRC resources are stretched, so delays are common. 

If you enter a wider dispute resolution process then it will take considerably longer again. A company should account for a minimum of 18 months from opening of enquiry to completion when accounting for dispute resolution. In the most extreme cases, an enquiry can take several years, such as Hadee Engineering Co Ltd v HMRC [2020] UKFTT 497 (TC), which dealt with an R&D claim for the 2009/10 tax year. The lengthy enquiry was followed by litigation. The Tax Tribunal’s judgment was released in 2020 – 10 years after the period in question. 

It is important to reflect any feedback received from HMRC in your future R&D claims. Companies that have experienced an enquiry often choose to update their R&D record-keeping to support future claims.

Your first claim after an enquiry

The first R&D tax credit claim you submit after an enquiry is resolved is critical. You will need to show that your new claim addresses the feedback discussed with HMRC in the enquiry. You may also need to show that you have strengthened your record-keeping measures and methodology. This is particularly important if your claim was adjusted during the enquiry and/or if HMRC charged a penalty or suspended penalty. 

You should be prepared for your next claim after an HMRC enquiry to be checked. The agreement of R&D in a prior year’s enquiry does not preclude subsequent claims from being enquired into. If HMRC are not able to see the progress or corrections made based on its prior feedback they will likely view this unfavourably. ForrestBrown can help prepare or review your first claim after an R&D enquiry to ensure all the necessary steps have been taken, and to protect your ongoing relationship with HMRC.