If you’ve received an HMRC compliance check or enquiry, you could be understandably worried about what this means for your business.

While most claims go through without any issue, since HMRC enhanced their R&D compliance checks in 2022, there has been a massive increase in the number of enquiries that are coming through to claimants, swamping R&D consultants, accountants and finance departments with additional work that can be time consuming to complete.

In this article, we’re taking a look at why your business may be sent a compliance check, how to complete them and how you can avoid receiving them again in the future.

What is an R&D tax relief compliance check?

An HMRC compliance check, or ‘enquiry’, is sent through to a business if there is more information required about your R&D claim in order to process it. Most likely, this will be a query around the legitimacy or accuracy of the information you’ve provided. You could also receive an enquiry as part of a random sampling from HMRC.

You will receive a list of questions from the HMRC inspector which are designed to gain further insight into your financial and technical data, as well as the calculations in your submission. Most enquiries will involve multiple rounds of questions and can take quite a long time to complete, with some businesses reporting that it has taken years to resolve their compliance check.

Understandably, this can cause a lot of frustration for your business as this delays your funding, but it can also be potentially damaging for your relationship with HMRC if you are found to have completed your claim incorrectly.

What are the most common reasons for an enquiry?

There are 4 most common reasons for HMRC to launch an R&D tax relief compliance check:

1. Financial discrepancies If your numbers don’t add up, this will be flagged by HMRC. They will check your submission against your corporate accounts, so if there are any discrepancies in what you list within your R&D costs, this can be a big problem for HMRC. Although accounting errors can be easy to make, they can have huge repercussions when it comes to filing your R&D claim

2. Lack of evidence for R&D activities When claiming R&D tax relief, you can only include activities that come under the government’s definition of eligible R&D. This needs to be proven through your claim narrative, with evidence to explain how you have aimed to make technological advancement in your field by tackling scientific or technological uncertainties. If you’re unable to convince HMRC that this has been carried out, they may send an enquiry to understand whether your R&D activities are indeed eligible, and if not, may reduce the size of your claim.

3. A dramatic change in your claim size If you submit a large claim when your previous claims were comparatively small, this could be a reason for HMRC to investigate. While it could be for a completely valid reason, if it isn’t properly explained within your narrative, this will raise flags and result in an enquiry on your account.

4. Random sampling As mentioned above, HMRC does launch random enquiries against a number of claims at random to test the overall compliance of R&D tax relief claims. They use the results to understand whether they need to update their guidance or allocate more resources to their compliance checking teams.

What do I need to do if I get an R&D tax relief enquiry?

When you receive an enquiry, you will be required to enter into a back-and-forth communication with HMRC to answer any queries they have. This could be in the form of writing, conference calls or in-person meetings.

The amount of time that it will take to complete your enquiry depends on the level of questioning and how well you can answer the inspector’s questions. It’s important that you answer everything as clearly and succinctly as possible, providing the correct data and explanatory narrative around any areas that may be causing confusion.

It may be worth bringing in expert help to assist you with responding to the compliance check as they will know exactly what HMRC are looking for and how to resolve the issue as quickly as possible for you. Speak to us today to find out how we can help you.

What are the usual outcomes of an R&D tax relief enquiry?

If your claim is investigated, the outcomes can range from a delay in receiving your funding, to hefty fines. This will depend on the severity of the issue, as well as how quickly and concisely you can answer HMRC’s questions. The most common outcomes that you can expect include:

Delays All enquiries will result in a delay, however the length of this will depend on a number of factors including HMRC’s capacity to resolve. This is why it’s so important to respond to any questions as quickly and thoroughly as you can.

Additional time and cost Responding to an HMRC claim can take a huge amount of time, on average around 60 hours. If the claim is being handled internally, you will need to factor this in as it will be your senior financial and technical staff who will be needed to answer questions and resolve any issues. This can be expensive for your company, taking them away from their other internal duties.

Reduction in claim size If you’re unable to quantify some elements of your claim, these could be removed, reducing the amount of relief or cash credit that you receive. This can also be done for historical claims up to 7 years ago, so even if you’ve already received your R&D funding, you could be asked to pay it back.

Reputation issues If you are found to have submitted an inaccurate claim, this can weaken the trust that HMRC have in your company, increasing the likelihood that you’ll receive further enquiries in the future as well as a re-examination of claims that you’ve submitted in the past. This can have a massive financial impact, not just in terms of funding, but also internal time spent to resolve these.

Fines If the worst were to happen and HMRC finds that you intentionally attempted to defraud the taxpayer with your R&D tax relief claim, they can fine you up to the value of the funding that you claimed within your filing.

Avoiding an HMRC enquiry

As you may have gathered, receiving an HMRC enquiry can be a slow and expensive process, however there are a number of steps that you can take to avoid these occurring in the future.

Firstly, you should always ensure that every penny of your R&D projects are accounted for and tallied with your P&L, tax computations and CT600. You should also include a structured and thorough narrative on the financials associated with your R&D when completing your claim.

You should also take the time to explain any technical uncertainties that you faced during your R&D and how you overcame them. This will help to legitimise the work that you did and how these activities are eligible to claim for.

By far the best way to ensure your R&D tax relief submission does not result in an enquiry is to use a professional R&D tax specialist to complete it on your behalf.

Working with Taxar

At Taxar Innovation Partners, we are experts in this field, with thousands of successful claims under our belt.

We have worked on behalf of many of our clients to respond to HMRC compliance checks, making sure these are completed quickly and to the highest possible standard. We’re incredibly proud to say that we have never lost a penny of our client’s claims, and are trusted by a number of accountants to handle their client’s claims and compliance checks on their behalf.

Working with Taxar Partners we have forged strong relationships providing good value to our clients within a fair pricing structure. The speed of response from the Taxar team has been exemplary together with the highest level of professional service. We are delighted to continue to work with Taxar Partners and the feedback from our client base has been nothing but positive.

Andrew Charles - Director at Charles Stewart & Co Limited, Chartered Accountants

If you want to find out more about how we can help you with your compliance check, or to speak to us about an R&D tax relief claim, please get in touch.

You can also book a meeting directly with our Head of Partnerships.