The last year has seen an increase in the number of compliance mechanisms available to HMRC. How will these evolve in 2026 and how should businesses respond?
The HMRC R&D compliance landscape has evolved significantly since its peak in 2023. During this time, compliance checks increased from around 1% of claims to over 20%, following the adoption of a “volume compliance” approach by HMRC’s Individuals and Small Business Compliance (ISBC) Unit. Since then, the enquiry rate has, according to HMRC’s statistics for the 2023/24 tax year, declined to around 17%. This equated to compliance checks on around 9,700 of the total 61,000 R&D claims received during that period.
I wrote about HMRC’s evolving approach to compliance in my recent article for FT Adviser, noting an improvement in process from 2024 onwards. Yet despite apparent improvement, concern remains over certain processes used by HMRC to engage in compliance activities. Some of the mechanisms we’ve seen deployed in recent months suggest an uptick in the range of weapons in HMRC’s R&D compliance arsenal, some of which operate outside the statutory enquiry framework.
When that happens, what are the strategies available to taxpayers to deal with them?
Available R&D claim compliance mechanisms
For most of the relief’s existence, the bulk of enquiries have been run by HMRC’s Wealthy and Mid-Sized Business Compliance (WMBC) Directorate, alongside its Large Business (LB) Directorate. In mid-2022, ISBC began undertaking compliance work. Since then, we’ve seen enquiries opened by all three – though fewer by LB since its scope is considerably narrower.
More recently, we’ve supported businesses that have typically prepared their claim themselves or with another provider, both with WMBC and ISBC enquiries. This has given us unrivalled insight into enquiry trends. Compared to their 2023 peak, ISBC enquiries are now comparatively rare, but what have begun to emerge, are three different types of letters. Two have a specific focus, whereas the other doesn’t. We are informally calling the latter a “concern letter”.
The first are Enhanced R&D intensive support (ERIS) letters, in which HMRC ask for more information about how and why a business has calculated the R&D intensity threshold. This calculation is important as it will enable a loss-making SME to claim an enhanced rate of relief than it would otherwise be eligible for under the SME scheme. For expenditure incurred on or after 1 April 2023, this threshold was set at 40%, before being lowered to 30% for accounting periods beginning on or after 1 April 2024. Enhanced R&D intensive support is intended to recognise the role that R&D plays in driving innovation and economic growth, and delivers tax savings of up to 27% of qualifying R&D expenditure, compared to up to 16.2% in the merged scheme. This differential may go some way towards explaining the scrutiny which HMRC have applied to ERIS claims. One area of focus has been the R&D intensive threshold, particularly where there are connected companies, especially outside the UK.
The second are letters from HMRC’s Fraud Investigation Service (FIS letters). These letters have drawn criticism for their tone, which in effect suggests that the claimant company has submitted a fraudulent claim and that HMRC will not therefore pay it out. The letters also request more information on a claim, but we are aware of cases in which apparently satisfactory answers to the questions the letter contains had led to a WMBC enquiry.
The third are the “concern letters”. They invite the company to review its claim and, if it shares HMRC’s concerns about the claim’s validity, to amend its return to withdraw the claim. While we have only seen a handful of these letters, they appear to be an attempt to pre-screen claims for potential future enquiry.
What do these informal letters mean?
While WMBC and ISBC enquiries are unwelcome, they do sit within a formal statutory framework where the processes and rights of appeal are clearly set out. This isn’t the case for ERIS, FIS or concern letters. Rights of appeal in these cases are unclear and, as a result, it is entirely conceivable that businesses will receive them and, unsupported by an adviser, not know how to proceed. This could result in them giving up on a claim, despite having a project with valid R&D.
This concern is heightened in relation to first time claimants or SMEs, which are likely to have fewer resources or lack the confidence to respond to a letter, instead believing that the simplest option is to withdraw the claim. Yet, with the right support, businesses with qualifying R&D should be able to respond fully and with confidence, ensuring that the claim continues to progress.
What’s next for 2026?
Despite an overall downward trend in enquiries, it’s clear that there has been a proliferation in the means at HMRC’s disposal to engage in compliance activities. Each of them has a different risk profile, and different tactics are needed to resolve them.
We expect HMRC to deploy all of them in 2026. As a result, businesses should be prepared for potential follow up and ensure that their record keeping and methodologies are readily available.
Ideally, they should engage an R&D adviser to ensure that claims are robust at the point of submission and that HMRC compliance checks, in whatever form, are effectively dealt with. Submitting a claim with qualifying R&D and not pursuing it because of a concern over how to respond to a letter, would be giving up on valuable relief that could help fuel the next stage of your business’s development.
Do you need support with a compliance check?
If you have received a letter from HMRC that falls into one of the above categories, our experienced enquiry team has the skills to reassure and support you. Whether you would like a project review, advice on how to respond or full enquiry support, do get in touch for a confidential chat about your situation.