HMRC enquiries into R&D tax-credit claims: Everything you need to know

HMRC opening an enquiry into your R&D tax credit claim may initially be an unwelcome development. It is likely that you’ll need to dedicate some time to gathering additional information to support your R&D claim, and HMRC’s questions might be quite detailed. There is also the prospect of a delay in receiving any savings due as a result of your R&D tax relief claim, or potentially an adjustment to the value of the claim. Sometimes, HMRC will process an R&D tax credit claim before opening an enquiry, raising the risk that you’ll be asked to repay money to them if they aren’t convinced your claim is valid.

With HMRC enquiries on the rise, we’re here to share what you need to know about them and to deal with one if it happens. We’ll take you through HMRC’s enquiry process, what to expect, and how ForrestBrown can support you.

What is an HMRC R&D tax enquiry?

Most R&D tax credit claims are swiftly processed by HMRC. In most cases, a simple desktop review of the claim documents will be sufficient for HMRC to be satisfied and process your R&D tax credit claim. Sometimes, however, HMRC ask for more information to clarify any questions they may have. This process is known as an enquiry.

An enquiry means that payment of the R&D tax credit and/or tax repayment is likely to be delayed – although enquiries can sometimes happen after a claim has been processed.

Why do HMRC open R&D tax credit enquiries?

The government’s R&D tax credit incentives were introduced to help grow the UK economy and reward innovative businesses. They are managed and administered by HMRC. Although companies self-assess their R&D tax relief, to check for any errors and make sure the system isn’t being abused, HMRC raises an enquiry into a proportion of R&D claims each year.

The exact reasons why HMRC might open an enquiry into an R&D claim can vary. Their reasoning might be related to your company; a change in your circumstances, for example. Or, HMRC may have some questions about the nature of your R&D work: perhaps about your industry, or a particular technology you were working with. Take software as an example, a sector that has come under increasing scrutiny. HMRC now has its own software experts reviewing claims and digging into the details of software projects and the R&D.

These enquiries are part of HMRC’s responsibility for properly distributing government funds through the R&D tax incentives.

In recent times, HMRC has come under pressure from the Treasury to address the estimated level of error and fraud in R&D tax credit claims. This has resulted in a change in HMRC’s approach to R&D tax credits that is resulting in more enquiries. More on this shift below.

A new era for R&D tax relief

There is no doubt that Whitehall is worried about errors and fraud in R&D tax claims, and this is resulting in pressure on HMRC to take action. The government also opened a broad consultation into reforming R&D tax relief, in part to consider ways to change the incentive to tackle abuse.

These concerns relate to a discrepancy between the amount of expenditure on which R&D tax relief is claimed, and that which businesses report to the ONS that they are spending on R&D. In 2019/20, R&D spend reported in the government’s annual BERD survey (used to measure the UK’s total investment in R&D) was around half of the R&D expenditure on which HMRC has given out R&D tax relief. That’s a gap of more than £20bn.

There are differences in how the two figures are calculated and what’s included in each, however, the scale of the gap suggests some relief is being awarded for work that isn’t R&D. On top of this, the National Audit Office (NAO) has publicly criticised HMRC for not having a robust method to calculate an exact figure of erroneous relief or demonstrating a clear plan to resolve the problem.

Read about the National Audit Office’s findings on HMRC’s use of data to inform compliance actions.

Over the past few years, HMT and HMRC have taken the following steps:

• hiring of 100 extra compliance officers for R&D tax relief
• sending out nudge letters to companies claiming for software R&D
• introduced the new PAYE and NIC cap to protect against R&D tax relief tourism
• updated guidance on what types of activities qualify as software R&D
• tightened the rules on amending tax returns (CT600) to include R&D claims
• introduced an online service for companies to provide supporting information for their claim
• significantly narrowed their approach to subsidised expenditure, as highlighted in the  tax tribunal case for our client Quinn

Common reasons for an HMRC enquiry into an R&D tax credit claim

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

Some cases will be selected at random. This might seem unfair if you have diligently prepared your R&D claim and provided HMRC with detailed supporting information. However, the random selection program is designed to improve the data HMRC has on errors and fraud, and ensure that future compliance checks are well targeted. There are some other common reasons why HMRC might raise an enquiry into a claim:

• HMRC believe they have found an inconsistency. This could be something in your R&D claim which does not reconcile with other data HMRC holds about your business. This should be highlighted in their opening R&D compliance check letter.
• HMRC are 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.
• Either you haven’t submitted supporting information or something within that documentation raises a question which they believe could affect the amount of relief due.
• HMRC have 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. 
• HMRC are focusing enquiries on a particular sector or type of technology to ensure they are approaching claims in the sector consistently. A recent example of this is software.

This is why at ForrestBrown we put so time and effort into ensuring our R&D tax credit claims are as thorough and well presented as they can reasonably be. When we prepare your R&D claim, you have access to a multi-disciplinary team which includes chartered tax advisers and accountants and industry-experienced technical specialists, as well as ex-HMRC inspectors. All of our claims are reviewed thoroughly via our quality assurance process that is integrated into each stage of your claim and is there to manage any risks on your behalf. This robust approach by our team will give you confidence in your claim and stand you in good stead during an enquiry, should one occur.

How many R&D tax enquiries are raised?

No official data is published on the number of enquiries that are raised in any given period. HMRC has a compliance team dedicated to reviewing R&D tax relief claims. It added 100 new recruits to this team in 2020, responding to a substantial case of R&D fraud and wider concerns regarding the quality of R&D claims being received. To put this increase into context, the 100 new recruits joined an existing team of between 20 and 30.

HMRC’s expanded R&D tax compliance team significantly increases the proportion of R&D claims it can review in detail each year. This means that enquiries are becoming increasingly more common. Even if you have made claims for a number of years, you are far more likely to find your next claim is picked up for review.

Who is more likely to face an R&D tax enquiry?

We’ve already covered some examples of circumstances that might increase your risk of enquiry, such as inconsistencies, changes in circumstances and specific technological areas.

HMRC follows a risk-based approach, so you are more likely to be the subject of an enquiry if there is more tax at stake, however this does not mean that smaller claims are risk-free.

As we have covered, receiving an enquiry can also be down to your sector – HMRC have paid particular attention to software R&D in recent years. 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. 

HMRC’s focus areas when it comes to risk assessing R&D claims do evolve, so it pays to be well-informed or well-advised. This means you can adapt your approach each year to keep your claim robust.

Avoiding enquiries

It’s important to point out that there’s nothing you can do to rule out getting an enquiry – sometimes your claim will be selected at random. Even outside of the random selection process, it is possible that HMRC may want to check something with you and there is only so much you can do to predict any questions a case worker could have.

What is really important is to be confident that your claim can withstand scrutiny. HMRC expects you to take due care and attention when preparing your R&D claim, and will expect clear, complete and timely answers to the questions they pose. A well-prepared claim should be paid once you have provided this additional information. Poorly prepared claims can result in HMRC charging penalties if any adjustments are required. This can have an impact on your overall relationship and risk rating with HMRC.

Sometimes even if your claim is detailed and robust, you may find yourself in a disagreement with HMRC. If that happens, having the right adviser on your side can make all the difference. Read how ForrestBrown secured the right result for our client Quinn at the tax tribunal.

Read more on how to avoid R&D tax enquiries or more accurately be prepared if one is opened.

How working with ForrestBrown helps you

Our team ensures the highest level of care and attention is given to the preparation of all our R&D claims at ForrestBrown. And with an expert multi-disciplinary team, streamlined processes and technology we make it as easy and efficient as possible for you.

1. Expert team – our chartered tax advisers and sector specialists understand your business and the context of your R&D work inside and out. This allows them to create a robust methodology before preparing your claim documentation. At ForrestBrown, you can also be confident that we are up to date with any developments around the incentive. We operate at the leading edge of policy, keeping track of everything from HMRC’s approach to subsidised R&D to forthcoming legislative changes for overseas R&D.
2. Quality assurance – each of our claims is subjected to a thorough quality assurance (QA) process. Our QA process documents all of the evidence on which your R&D claim is based, as well as any decisions made and risks identified. It is designed to ensure that all our claims are robust enough to withstand the close scrutiny of HMRC enquiries before they are submitted. Our ex-HMRC inspectors are closely involved in our QA process, helping to anticipate the types of questions HMRC might ask in each case.
3. Relationship with HMRC – we’ve worked closely with HMRC for many years, including on enquiries into claims our team has prepared, and where we have been asked to step in to resolve an enquiry or dispute with HMRC. This allows us to have productive discussions that help shape our approach to successfully resolving your enquiry. Our director Jenny Tragner sat on HMRC’s R&D Consultative Committee from 2013 onwards and remains closely involved in policy discussions involving R&D tax. The former HMRC inspectors in our team know what it’s like to be on the other side of the desk, which helps us to understand HMRC’s needs.

What happens during an HMRC R&D enquiry

When HMRC 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.

1. The first stage of an enquiry will be a letter (or email) from HMRC saying that they are conducting a compliance check or opening an enquiry into your R&D tax credit 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.
   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 if 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.

2. In response to this request, you will need to collect the relevant information and documentation, and liaise with the HMRC case worker or tax inspector 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.

3. It is important to collate all of 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, or providing so much unordered additional information that the HMRC case worker cannot clearly understand it.

4. What happens next depends on your case. HMRC may close the enquiry if the case worker is satisfied that you’ve answered all of their questions. If this happens, you’ll receive a closure notice and any amounts due to you will be processed.
   It is common in R&D enquiries for HMRC to request a call with your competent professional(s) to discuss your R&D projects, so this might be the next step. 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 and at ForrestBrown we recommend having our team with you every step of the way, helping you prepare and fully supporting you and your team in any meeting.
   Or, 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 the time of you and your team and the value of your R&D claim.

What to do if you are facing an enquiry

When facing an enquiry, it’s important to make a plan and get the support you need as soon as you’re informed. You may already have an R&D adviser, or this might be the right moment to engage one. Either way, ForrestBrown can help.

Facing an R&D enquiry as a ForrestBrown client

If you are already a client of ForrestBrown, the first thing to do is to let us know and forward the correspondence you have received to us. We can quickly assemble the right team, make a plan and we’ll typically pick up the communication with HMRC from this point. We may even receive the compliance check letter directly from HMRC, in which case we will contact you to kick off the process. We have considerable technical firepower, a proven enquiries process, and are experienced in liaising with HMRC to reach a resolution.

The first stage of the enquiry will be for our team to review the request from HMRC. Our experience means we have a good understanding of exactly what HMRC are looking for and why they are asking. We will coordinate the collection of all the relevant information they need. Our team will also make contact with the inspector on the case to start a productive dialogue and agree timelines.

It goes without saying that if 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 enquiry support service

​​If you are not already a ForrestBrown client when you receive a compliance check letter, you can still benefit from our enquiry support service, whatever stage of the enquiry process you are at. We offer an outcome-focused service for SMEs and large companies tailored to your needs. This can include a full pre-emptive review of your R&D claim on a consultancy basis, right through to taking over the entire process on your behalf.

Here is an overview of the process you can expect when you engage us to manage your enquiry on your behalf:

• We will quickly make contact with HMRC to let them know we have picked up your case and agree next steps.
• We will review your claim methodology along with all your documentation, source data, and all your enquiry correspondence.
• Following this review, we’ll report back to you our findings and what these mean for your claim and the enquiry. If we have identified any errors which need to be corrected, we’ll discuss how this is best handled, and we’ll explain any other risks we’ve identified.
• If we don’t have enough information, we will set out what we need, which may include speaking to your technical team to discuss the R&D projects.
• We will then recommend a resolution strategy, prioritising a timely resolution of the enquiry and achieving the best possible result.

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 and can help you create and implement best-practice processes and record-keeping measures for your unique business needs.

How long does an enquiry last and what else might happen?

Depending on the complexity of the claim, an enquiry will typically take between several weeks and several months to reach closure. During the enquiry, changes to the claim methodology and/or record-keeping processes can be agreed to support future claims. It is important to reflect any feedback received from HMRC in your future R&D claims, and companies that have experienced an enquiry often choose to update their R&D record-keeping to support future claims.

Outcomes of an R&D tax enquiry

There are several possible outcomes to an R&D tax credit enquiry – we dive into them all 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 – a well prepared claim will likely be closed by the inspector and payment made – and the nature of the questions raised by HMRC.  There are notable exceptions to this –  such as with our client Quinn where a well prepared and supported claim wasn’t accepted without a 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: further meetings and discussions will be held until resolution.

If issues remain and discrepancies are found, your claim could be reduced, retracted or penalties imposed. HMRC have the power to impose penalties of 0-100% of your claim value for carelessness or even negligence in your claims preparation process. Your cooperation and responsiveness during an enquiry can reduce or increase any penalties. If HMRC is concerned, it may also investigate previous claims that have already been paid out.

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.

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 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 anticipate that your next claim after an HMRC enquiry will be checked and HMRC will open another enquiry if they are not satisfied, or if new questions arise. ForrestBrown can help prepare or review your first claim after an R&D enquiry to ensure all of the necessary steps have been taken, and to protect your ongoing relationship with HMRC.