HMRC’s Process for Assessing and Verifying R&D Tax Claims

In an attempt to combat abuse and ‘boundary pushing’ within R&D tax, HMRC has ramped up its compliance measures to assess and verify the validity of submitted R&D tax claims. With increased HMRC scrutiny, it’s more likely that companies may receive correspondence from HMRC questioning the level of baseline capability or knowledge that the project sought to advance or querying the competency of the professionals involved in the R&D projects.

Firstly, let’s look at the R&D tax submission process to understand at what points companies might expect HMRC to roll up its sleeves and get involved.

Submission of the R&D Tax Claim

According to HMRC, its R&D compliance approach is built on helping customers get it right the first time and removing opportunities for non-compliance. HMRC calls this work ‘upstream’ compliance as it happens before a claim is made.

Since August 2023, companies intending to claim R&D tax credits need to complete and submit an Additional Information Form (AIF) prior to the filing of the corporation tax return. Without this form, HMRC will not process claims.

The form is structured to capture information relating to the R&D projects, which previously was not mandatory to provide. Claimants are required to explain in detail, for example, the areas of science or technology that it planned to advance, the scientific or technological uncertainties faced, and the activities undertaken by the company to resolve them.

Furthermore, the AIF now requires a breakdown of qualifying R&D expenditure such as staff costs, EPW’s, materials, software, and subcontractor expenses, per project.

HMRC is essentially using the AIF as a verification tool, as it also requires:

• Each claim to be supported by a named officer of the company to help prevent claims being submitted without the company’s knowledge or understanding.

• Details of any agent associated with a claim so HMRC can move quickly where it has concerns about potential agent misconduct

In essence, this limits the ability of agents who facilitate spurious claims to do so for earlier years where a company has correctly not previously claimed the relief. HMRC has also stated that it is proactively reaching out to customers who are new to the R&D regimes and to those in sectors where there are limited opportunities for businesses to make compliant claims.

Digital Risk Assessment

As stated by HMRC, the submission of R&D claims digitally enables it to more effectively risk assess claims. Previously, HMRC introduced the mandatory random enquiry programme (MREP) to randomly sample claims to gauge the levels of non-compliance. The data collected from MREP provided HMRC with a list of non-compliance ‘triggers’ in areas of customer behaviour, size of expenditure, sectors, first-time claimants, use of agents, etc.

At this stage, HMRC’s efforts are, therefore, focused on the areas of highest risk where businesses are unlikely to be eligible for R&D but risk being approached by unscrupulous agents.

Detailed Examination

Where HMRC cannot ‘design out’ non-compliance by preventing it during the claim process, or by promoting it through customer education, it carries out targeted interventions. In these cases, specialist staff will undertake more detailed examinations of the claims to ensure they meet the criteria set out in the R&D tax guidelines.

HMRC will usually request further documentation or clarification from the claimant to better understand the R&D activities undertaken, along with the associated costs claimed.

Below are some points that have been raised by HMRC during a formal enquiry process:

• Can you provide a more detailed explanation on why you believe this to be an advance in the field of science or technology relative to what is already in the public domain or already deducible?

• What was the gap in scientific and/or technological knowledge or capability that necessitated the commencement of the R&D?

• Please explain the research undertaken to establish these uncertainties in the overall field of science or technology that could not be solved by the competent professional(s), or by information that is publicly available.

What Happens If an R&D Claim Is Rejected by HMRC?

If HMRC rejects an R&D tax claim, it can have several implications for the business. Here’s what typically happens:

1. Notification of Rejection

Written Explanation:

HMRC will provide a written explanation detailing the reasons for rejecting the claim. This may include disagreement about the eligibility of activities, the accuracy of the financial details, or in some cases, outright non-compliance with the submission requirements.

2. Opportunity to Amend or Appeal

Amendment:

The business may have the opportunity to amend the claim to address the issues highlighted by HMRC. This could involve providing additional evidence, correcting errors, or clarifying uncertainties.

Appeal:

If the business believes that the rejection is unwarranted, it has the right to appeal the decision. This involves submitting a formal appeal to HMRC and applying to use alternative dispute resolution (ADR) to settle the tax dispute. At this point, a mediator will be assigned to the case and the claimant will have the opportunity to provide oral evidence about the R&D projects undertaken.

3. Financial Implications

Repayment:

If the R&D tax credit has already been received and HMRC subsequently rejects the claim, the business may be required to repay the amount received, along with any applicable interest and penalties.

Adjustment of Tax Position:

The business’s Corporation Tax position will need to be adjusted to reflect the disallowed R&D claim, which may result in a higher tax liability.

4. Future Claims

Increased Scrutiny:

Future R&D claims from the business may be subject to increased scrutiny by HMRC. The business will need to ensure that future claims are meticulously prepared and fully compliant with HMRC guidelines.

Best Practices to Avoid Rejection

To minimise the risk of having an R&D tax claim rejected, businesses should adopt the following best practices:

• Accurate and Detailed Documentation:
  Maintain comprehensive records of R&D activities and associated costs. Ensure that the technical and financial aspects of the claim are thoroughly documented.
• Professional Advice:
  Consider engaging R&D tax relief specialists or consultants who have experience with HMRC’s requirements and can help prepare robust claims. This is where TBAT can help. Our team of expert R&D tax consultants has extensive experience working directly with HMRC, ensuring your claim is both compliant and optimised. We help you avoid costly errors, uncover all eligible costs, and present your technical narrative in a way HMRC understands and accepts.
• Proactive Communication:
  If HMRC does raise a query, it’s essential to respond quickly and clearly. Delays or vague responses can derail your claim. At TBAT, we support you throughout the enquiry process, preparing clear, well-structured responses and offering direct liaison with HMRC where needed. Our proactive approach ensures issues are resolved efficiently and without unnecessary stress.
• Stay Updated:
  R&D tax relief regulations have seen numerous changes in recent years, and more are on the horizon. Staying up to date is crucial for both eligibility and compliance. TBAT keeps clients informed of key legislative updates, policy shifts, and changes in HMRC guidance.

By understanding HMRC’s assessment process and taking proactive steps to ensure compliance, businesses can increase the likelihood of successfully claiming R&D tax relief and avoid the complications associated with claim rejections.

If you’re ready to take the stress out of your R&D tax relief claim, or if you want expert support during an HMRC enquiry, book an appointment today. We’re here to make sure your innovation gets the recognition (and reward) it deserves.