Since January 2023, HMRC has increased scrutiny, with one in five claims facing enquiries to combat fraud and errors. Below is a concise guide on what to do, to help you navigate the enquiry effectively. If you used a specialist to prepare the claim, you should contact them as soon as possible.

1 | Stay Calm and Review the Letter Carefully

• Read the HMRC letter thoroughly to understand the scope of the enquiry, such as specific aspects of the claim (e.g., project eligibility, costs, or calculations) or documents requested.

• Note any deadlines for responding (typically 30 days) and whether HMRC has requested a meeting, additional information, or specific records.

• Don’t ignore the letter, as failing to respond promptly can lead to claim rejection, penalties, or further scrutiny.
  

2 | Gather Your Documentation

• Compile all records related to your R&D claim, including:

• • Additional Information Form (AIF): Mandatory since August 2023, detailing projects, uncertainties, and costs.

• • Technical Narrative: Explaining the scientific or technological uncertainties, advances sought, and methodologies used.

• • Cost Records: Breakdowns of qualifying costs (e.g., staff salaries, materials, software, subcontractor costs) with supporting evidence like timesheets, invoices, or payroll records.

• • Project Evidence: Test data, prototypes, trial logs, or project plans demonstrating R&D activities.

• Ensure records align with HMRC’s definition of R&D: projects advancing science or technology (including pure mathematics) by resolving uncertainties a competent professional cannot readily address.

• Retain records for at least six years, as HMRC may request historical data.
  

3 | Assess the Claim’s Compliance

• Review your claim to ensure:

  ✓    Projects Qualify: Confirm they involve genuine scientific or technological uncertainties, not routine improvements.

  ✓   Costs Are Eligible: Verify costs (e.g., staff, consumables, software, cloud computing) are correctly apportioned and exclude non-qualifying expenses (e.g., marketing, routine operations).

  ✓   Scheme Compliance: Check if you applied the correct scheme (merged scheme’s 20% credit or ERIS’s 186% super-deduction/14.5% cash credit for R&D-intensive SMEs with ≥30% R&D expenditure).

  ✓    Subsidy Rules: Ensure no double-dipping with grant-funded costs, as subsidized projects may limit relief to the merged scheme.

• Identify any potential errors or weak areas (e.g., insufficient detail in the AIF or overstated costs) that HMRC might question.
  

4 | Engage Professional Support

• If you prepared the claim yourself, you should consider consulting an R&D tax specialist or accountant experienced in HMRC enquiries.

They can:

     → Review your claim for compliance and accuracy.
     → Prepare responses to HMRC, ensuring technical and financial details are robust.
     → Represent you in discussions or meetings with HMRC to clarify complex issues.

• If you used a specialist or an accountant to prepare the claim, contact them immediately to assist with the enquiry.
  

5 | Respond to HMRC Promptly

• Prepare a clear, concise response addressing HMRC’s specific queries, supported by your documentation.

• If additional information is requested, provide it within the deadline, ensuring it is well-organised (e.g., indexed documents, clear cost breakdowns).

• If HMRC requests a meeting, prepare to explain your R&D projects, focusing on the scientific/technological uncertainties and advances, ideally with a competent professional (e.g., lead engineer) present.

• Be honest about any errors; voluntary disclosure of mistakes can reduce penalties.
  

6 | Understand Potential Outcomes

→ Claim Accepted:

If HMRC is satisfied, the claim proceeds, and you receive the relief or cash credit.

→ Claim Adjusted:

HMRC may reduce the claim if some costs or projects are deemed ineligible, requiring repayment of overclaimed credits with interest.

→ Claim Rejected:

In rare cases, HMRC may reject the entire claim if it doesn’t meet criteria, potentially leading to repayment and penalties.

→ Penalties:

Errors due to carelessness or deliberate misrepresentation can incur penalties (up to 100% of the overclaimed amount) or broader tax audits.

→ Appeals:

If you disagree with HMRC’s decision, you can request a review or appeal within 30 days, potentially escalating to a tax tribunal.

7 | Mitigate Risks Moving Forward

• Learn from the enquiry to strengthen future claims:

  ✓   Enhance documentation with detailed technical narratives and cost tracking.

  ✓   Ensure the AIF is comprehensive and accurate, covering representative projects and costs.

  ✓   Verify R&D intensity calculations for ERIS eligibility (≥30% of total expenditure).

• Consider pre-submission discussions with HMRC’s Advance Assurance service for first-time or high-risk claims to reduce future enquiries.
  

Key Considerations

HMRC’s Increased Scrutiny: Since 2023, HMRC has intensified efforts to curb fraud, particularly targeting overstated claims or non-qualifying activities. Robust documentation is critical to demonstrate compliance.

PAYE/NIC Cap: For loss-making companies, ensure the claim aligns with the cap (£20,000 + 300% of PAYE/NIC liabilities) to avoid disputes over cash credits.

Time Sensitivity: Delays in responding can escalate the enquiry, so act quickly and meet all deadlines.

Professional Costs: Many specialists include HMRC defence in their fees. Some will charge for this service whilst others may not be prepared to get involved. While hiring a reputable specialist incurs fees, their expertise can save time, reduce stress, and potentially preserve more of your claim.

Practical Tips

  ✓   Act Promptly: Acknowledge HMRC’s letter within a few days, even if just to confirm receipt and request clarification if needed.

  ✓   Organise Records: Use a clear filing system to present evidence efficiently, as disorganized submissions can prolong enquiries.

  ✓   Be Transparent: If errors are identified, disclose them early to HMRC to demonstrate good faith and potentially reduce penalties.

  ✓   Leverage Expertise: Specialists can interpret HMRC’s technical questions and provide tailored responses, especially for more complex claims.

Get the support you need

If you’re facing an R&D tax enquiry, we’re here to help. Contact the ABGi Team, to find out how we can assist you through the
process and work towards the best resolution for your claim.