HMRC intensifies scrutiny of Research & Development (R&D) tax claims

HMRC has significantly increased its scrutiny of R&D claims in the last couple of years in an attempt to combat incorrect claims being made in company’s tax returns. However, as a result of the increased number of enquiries, it is felt that many companies making legitimate R&D claims are having their claims enquired into. This can be challenging as bringing an R&D enquiry to a conclusion can be a costly and time-consuming process. In 2024, one in five claims faced an enquiry, compared with just one in 20 two years earlier.

HMRC have also revealed that in the 2023-24 time period, the amount of tax relief claimed through the small medium enterprises scheme has decreased by 29% to £3.15bn. In addition, the number of R&D tax credit claims has decreased by 26% in this period. The R&D compliance crackdown includes creating a specialist anti-abuse unit, which added 300 staff to HMRC’s small business compliance team. Around 500 officers now focus on detecting errors and fraud in R&D claims.

Two new measures are also raising the bar. The additional information form (AIF) requires claimants to submit detailed project and cost breakdowns upfront before a claim is formally submitted to HMRC. In addition, first time claimants or those who have not claimed relief in the prior three years as part of the original tax return submitted to HMRC must also submit to HMRC a pre-notification form. If a pre notification form is due, it must be submitted to HMRC within six months of the end of the company’s year end. If this is not done, HMRC will not allow a claim for R&D relief for the applicable accounting period even if genuine R&D activity has taken place.

There are three key steps to reduce risk when making R&D claims:

• Strong documentation is the best defence in an enquiry. Businesses should ensure they track project milestones, staff time and costs using reliable systems, and back up claims with payroll data, invoices and receipts.
• Compliance should not be a last-minute task. With regular reviews and early preparation, accountants can guide clients to embed good practice throughout the year.
• Rejected claims damage cashflow and confidence. Businesses that combine robust documentation with technical expertise and innovative tools put their clients in the best position.

If you are making an R&D claim, we would strongly encourage that fee protection insurance is taken out. Dealing with HMRC in connection with a R&D enquiry can be a very lengthy and time consuming process and this will help reduce the cost of dealing with any enquiry. With increasing enquiries, preparation and accuracy are essential for every R&D claim.

If you have any further questions regarding this article, please contact Joe Wilson on 023 8046 1237 or email Joe Wilson.