Posted: 19 / 08 / 2025

Article by: Rob Newton – Compliance Manager and Ciarán Downs – Associate Director

Understanding and Mitigating HMRC Enquiries Into R&D Tax Claim

Claiming R&D tax relief represents a significant opportunity for UK businesses to receive recognition for their investments in innovation. Nevertheless, the process is not without its complexities, particularly if HMRC initiates a compliance check, commonly referred to as an HMRC enquiry. 

Enquiries can be initiated by various departments within HMRC. For R&D tax claims, an enquiry typically originates from one of two departments:

  • The Wealthy and Mid-sized Business Compliance Directorate (‘WMBC’) focuses on large corporations, wealthy individuals, and mid-sized businesses, using a targeted approach with direct engagement and support from named HMRC officers.
  • In contrast, the Individual Small Business Compliance Unit (‘ISBC’) targets small businesses and self-employed individuals, employing a more standardised and impersonal ‘volume compliance’ method, often without a specific named caseworker and relying on templated information requests.

Generally speaking, the WMBC tends to be more approachable and willing to engage with companies about their R&D claims, while ISBC tends to be more bureaucratic and binary in its decision making, frequently unwilling to hold verbal discussions with taxpayers on the matters at hand.

What aspects of an R&D claim do HMRC enquiries tend to focus on?

Understanding the common areas of HMRC scrutiny can aid in preparing a robust R&D tax credit claim. HMRC’s primary concern is understandably whether the project qualifies as R&D according to the R&D Tax Guidelines , the “is this project R&D, and if so, to what extent?” question. The claimant company must be able to provide evidence of scientific or technological advancements sought and uncertainties faced, led by a Competent Professional in the field (who may or may not be an employee or director of a company).

A Competent Professional, broadly defined as someone with significant expertise in the relevant field of your R&D project including a detailed understanding of the current ’state of the art’, is vital for successfully defending an R&D claim. In the absence of a Competent Professional able and willing to make the case that your project is R&D, your claim will be almost impossible to defend. This has been exemplified in the recent (July 2024) first-tier tribunal cases of Get Onbord Ltd and Tills Plus Ltd.

Once HMRC is satisfied that a project qualifies as R&D, their focus shifts to the expenditure categories claimed (for example, staffing costs, payments for sub-contracted activities, and consumable materials). HMRC are likely to query the nature of the costs claimed, and the rationale behind the proportion of project costs that have been allocated to qualifying R&D activities. Documentation and evidence such as underlying contracts, invoices, bank statements, notes of meetings, email correspondence, accounting data et cetera may be requested.

Why have I received an enquiry letter from HMRC?

HMRC is now investigating 20% of R&D tax claim submissions, a significant increase from the previous (longstanding) rate of around 1%, according to a recent House of Commons report. These enquiries, which are designed to check and challenge the eligibility of R&D tax claims, can last several months, are highly time-consuming, and may result in loss of the tax relief (in full or in part), penalty charges, and reputational damage. Based on HMRC’s latest published statistics, a 20% enquiry rate means approximately 18,000 investigations per year, highlighting HMRC’s intensified focus on ensuring compliance.

The initiation of a HMRC enquiry does not necessarily imply invalidity of the claim. HMRC routinely examines R&D tax credit claims to ensure compliance, just as scrutiny is applied to other areas of our taxation system. These checks can be prompted by factors such as incomplete or (seemingly) incorrect submissions, company SIC codes that don’t imply R&D, an extension of enquiries into other areas of a company’s tax affairs,  claims for amounts of expenditure that are comparatively high when compared to figures shown in filed accounts, or they may be conducted on a randomised selection basis.

Upon receiving a HMRC enquiry letter, it is imperative to respond both promptly and comprehensively and set a plan as to what actions are needed, by who and when. Typically, HMRC requests additional information within 30 days of the date on their correspondence, however it is often possible – particularly in the early stages of an enquiry – to request an extension to allow sufficient time and effort to be allocated to the response. It is crucial that responses are thorough and precise to avoid misunderstandings (or misrepresentations) and anticipate follow up questions.

What does the enquiry process look like?

HMRC’s current approach is more stringent than ever seen in the history of R&D tax incentives in the UK, potentially causing significant stress for businesses that have acted in good faith and sought professional advice. The R&D claim enquiry process often involves multiple rounds of communication with HMRC, which can take several months or even run into years in the extreme.

The ideal scenario is where the HMRC caseworker is engaged with the issues at hand, is willing to hold intelligent discussion (whether in person or over video call) to understand the evidence the company can provide and fundamentally treats the claimant company with respect. It is rare for both parties to agree on everything, but a reasonable compromise can usually be reached in terms of which R&D projects qualify (and to what extent), and the eligibility of the associated R&D expenditure for inclusion in the claim.

The less-than-ideal scenario is where the HMRC caseworker is unwilling to hold meetings or video calls, the caseworker changes frequently during the enquiry, and subsequent rounds of correspondence from HMRC do not build up an understanding of the claim but rather re-iterate similar questions repeatedly without discernible progress towards a resolution.

No matter the particular scenario, Sedulo provides pragmatic and straightforward support at all stages, interpreting HMRC’s responses and advising on possible courses of action, including Alternative Dispute Resolution (‘ADR’) or appeals to the First-tier Tribunal. That said, we will only recommend continued enquiry defence if we can see the merit in a company’s case that their activities were R&D for tax purposes, we recognise that on some occasions the right thing is to cease defence and turn attention to mitigating (or eliminating) potential HMRC penalties.

In some cases, HMRC fails to uphold its customer service Charter when undertaking enquiries into R&D tax claims. Taxpayers have obligations but also rights to be treated fairly and without prejudice, meaning that procedural mistakes or poor practice from HMRC should be highlighted and can have a bearing on the outcome of an enquiry. Ultimately companies should remember that HMRC is the enforcement arm of the government in the arena of taxation, and much like the role of the Police in enforcing law and order, HMRC do not get to decide what the law is and must act within certain constraints in discharging their duties to society.

What to do next?

Engaging an experienced and competent R&D tax specialist can greatly ease the enquiry process and maximise chances of success. Ideally you should look for a combination of technical and financial expertise. For instance at Sedulo our consultants possess extensive knowledge of R&D tax relief schemes and can assist in navigating the complex documentation requirements across both the technical (R&D activity) and costing (R&D expenditure) strands, ensuring that enquiry responses to HMRC are accurate, complete, and in line with tax legislation and HMRC guidance (where that guidance is a reasonably interpretation of the legislation and case law!).

If you’re in the fortunate position of not having an ongoing R&D enquiry, you should nonetheless plan for such an eventuality in order to protect the value generated from R&D claims. Sedulo works with clients to ensure that information frequently requested by HMRC during compliance checks is captured upfront during the claim preparation process, or appropriate record-keeping measures are put in place, so that the supporting evidence is there if needed.

Conclusion

An HMRC enquiry into your R&D claim can be time-consuming, frustrating and costly. Adopting a proactive, measured and pragmatic approach is essential to improve the likelihood of a favourable resolution. Having a capable adviser can significantly streamline the process, avoid common pitfalls and hold HMRC to account. For assistance, contact our team without delay.