HMRC enquiries are on the rise for R&D tax credit claims

As HMRC continues to tighten up compliance measures for R&D tax credit claims, the number of enquiries is increasing significantly. If your company claims tax relief via the R&D scheme, you need to be aware of what they are and how to proactively mitigate the risks of one being raised. You also need to consider whether the advisor you choose to help with your R&D tax claim will be able to help you navigate potential future enquiries.

What is an HMRC enquiry for an R&D tax credit claim?

• An enquiry is an official investigation from HMRC
• Can be raised up to 12 months after payout and up to 20 years after payout if fraud is suspected
• Require more info to determine eligibility
• Takes an average of 13 months to resolve
• Can result in payout refusal or reduced payout; penalties are now set to be levied, and prosecution is possible if fraud is proven.

Are enquiries common for R&D tax credit claims?

Enquiries happen, but they were rare until the summer of 2022. In the summer of 2022, HMRC became aware of higher rates of fraud and abuse within the R&D tax credit scheme, and enquiry numbers have risen.

The rise in enquiry volume can be attributed to 4 key factors:

1. In late 2022, HMRC announced that an additional 500 enquiries would be randomly raised each year to help combat fraud further.
2. HMRC is tightening up on compliance, which means inspectors will look at claims in more detail.
3. A large number of new inspectors have been hired to handle R&D tax claims, but they’re inexperienced and more likely to raise an enquiry if the claim isn’t clear-cut.
4. Several advisors (and companies) are still making claims for ineligible work or submitting claims that need more detail to clarify eligibility.

What impact does the enquiry have?

• Time spent working on it = avg 13 months
• Time spent not with money (lenders of Advance Funding not keen if in an enquiry)
• Cost if your advisor doesn’t support you
• Could be penalties

How can my company avoid an enquiry?

• Choose an advisor who is experienced and reputable
• Don’t include marginal/non-R&D costs to be cheeky – take advice on what is qualifying, including your industry. 
• Make sure the numbers are correct
• Don’t claim 100% on individual R&D costs
• Make sure the numbers are correct
• Include a technical narrative that clearly articulates the advances made
• Review and discuss the claim report with your advisor before submission
• Cross your fingers – enquiries happen; it’s part of the landscape

What about tax advisors who say they’ve never had an enquiry?

In the past, not having handled an enquiry was a badge of honour for R&D tax advisors, who believed that it demonstrated the high quality of their service. Now, working with an advisor who hasn’t handled an R&D tax claim enquiry is more of a risk to your company.

Submitting a compliant R&D tax credit claim is more straightforward if you work with a specialist who does this daily; the same can be said of handling enquiries. Experience counts, particularly when dealing with new inspectors who are less au fait with the process.

You don’t want to be your advisor’s practice run – so rather than looking for an advisor who hasn’t handled enquiries, look for one who has handled them for clients and can talk you through their process. 

Ideally, you’d work with an advisor who includes the cost of standard enquiry handling as part of their overall fee. This suggests that the advisor stands behind the claim they’ve worked on with you and that they’re prepared to invest not-insignificant resources in defending it to HMRC. Given the time and energy it can take to defend an enquiry, charging by the hour is better for the advisor – but can significantly reduce the overall benefit for your company.  

How does EmpowerRD handle R&D tax claim enquiries?

• Standard enquiry support is included as part of our service
• Enquiry Response headed up by our Head of Tax, ex-HMRC of 30+ years
• Communicate with clients to keep them in the loop at every stage
• Have sufficient info in the claim report; revert to the client for further data if required
• Handle all comms w/ HMRC

Seeking a trusted partner to help you build your R&D tax claim?

We’re here to help. Over 1000 UK companies have trusted EmpowerRD’s R&D platform and specialists to help them build optimised, compliant R&D tax claims. Please get in touch with one of our experts today if you have any further questions.