R&D tax credits: claims, recent crackdown and HMRC enquiries

Navigating a Research and Development (R&D) investigation from HM Revenue & Customs can be challenging, especially as rules change. Knowing your statutory rights and obligations is essential to protecting your business. To help you understand broader compliance, we have created a guide covering the wider legal framework UK businesses must navigate. Securing specialist legal advice early can help safeguard your finances and reputation. Read on to learn how to manage this process effectively.

Key takeaways : How do you make a valid claim for research and development tax relief?

• Ensure your business is a limited company subject to UK Corporation Tax.
• Verify that your project seeks a genuine advance in a field of science or technology, rather than a mere commercial upgrade.
• Submit a detailed Additional Information form digitally before or on the same day as your Company Tax Return.
• Maintain comprehensive records to prove how you attempted to overcome scientific or technological uncertainties.

Ready to secure your innovation funding without fearing an unexpected tax investigation? Let us explore how.

Understanding the post-April 2024 merged RDEC scheme and ERIS

The innovation funding landscape changed significantly for accounting periods beginning on or after 1 April 2024. HM Revenue & Customs replaced the old SME and RDEC frameworks with a single merged pathway.

Key aspects of the new merged RDEC scheme:

• The merged route applies to most companies, regardless of size.
• The credit rate is 20% of qualifying expenditure.
• Companies must be trading, subject to Corporation Tax, and carrying out qualifying R&D.
• The credit is treated as taxable trading income.
• Overseas costs are generally restricted, with limited exceptions (e.g. Northern Ireland).

Enhanced R&D intensive support for loss-making SMEs

Loss-making small and medium-sized enterprises (SMEs) may qualify for Enhanced R&D Intensive Support (ERIS).

Key features of ERIS:

• Tax deductions: Eligible companies can deduct an extra 86 per cent of qualifying costs alongside the standard 100 per cent deduction, totaling 186 per cent.
• Payable credit: A cash credit worth up to 14.5 per cent of surrenderable losses is available.
• Intensity condition: Relevant R&D costs must constitute at least 30 per cent of total business expenditure.

The table below outlines the core differences between the two current schemes:

What qualifies for a valid R&D tax relief claim?

HM Revenue & Customs applies strict rules to determine what qualifies as R&D. Routine commercial problem-solving does not qualify.

Core eligibility requirements:

• The project must aim to achieve an advance in science or technology, not just benefit the business.
• The advance must be significant compared with existing knowledge, as assessed by a competent professional.
• Arts, humanities and social sciences are excluded; mathematical advances are included as science since 1 April 2023.
• The work must involve genuine technological uncertainty that cannot be easily resolved using existing knowledge.

What you must document:

• The baseline: existing knowledge before the project.
• The objective: the advance you intended to achieve.
• The uncertainties: specific technical challenges encountered.
• The work carried out: testing and methods used, including failed

Example Scenario (Fictional but based on HMRC guidelines):

A logistics software company cannot claim R&D relief if it simply builds a user interface using established, well-documented programming methods, as there is no technological uncertainty. However, developing a novel algorithm to integrate AI with legacy systems in an undocumented way may qualify due to genuine technical challenges and uncertainty.

Strict new rules: Claim notifications and additional information

HMRC has strict administrative requirements to prevent fraudulent R&D claims. Failure to meet them can lead to rejection.

Main submission rules:

• The Additional Information Form must be submitted before or on the same day as the CT600; late submission invalidates the claim.
• It must include company details (UTR, PAYE), a senior contact, adviser information, and clear project descriptions.
• Projects must be fully described if there are 1–3; larger portfolios require coverage of at least 50% of qualifying spend (up to 10 projects).
• First-time claimants (or those inactive for 3+ years) must notify HMRC within six months after the accounting period ends.

The recent HMRC compliance crackdown on R&D tax credits

The cost of R&D tax relief rose from £3bn in 2014 to £7.5bn in 2023, prompting a major HMRC crackdown on fraud and non-compliance.

Enforcement changes:

• Fraud and error fell from 17.6% (2021/22) to around 7.8% (2023/24), supported by tighter rules and a significant increase in compliance staff.
• Since April 2024, HMRC has paid credits directly to claimant companies, reducing the risk of agent interference or inflated claims.

Common HMRC challenge triggers:

• Claims from high-risk sectors such as retail, hospitality, or care homes.
• Routine commercial work presented as technological advancement.
• Weak documentation of baseline technology and scientific uncertainty.
• First-time claimants, historically linked to higher non-compliance rates (around 64% of initial claim value).

Scenario:

A small restaurant is told by an agent that menu and recipe development qualifies for R&D tax relief. The claim is submitted and the agent takes a fee from the £4,000 repayment. Later, HMRC reviews the claim, concludes there is no scientific or technological uncertainty, and requires the full £4,000 plus interest to be repaid, leaving the business liable despite the agent’s involvement.

Navigating an HMRC compliance check R&D and investigations

Claims flagged for risk may be subject to a formal HMRC compliance check. Around 92% of claims are processed within 40 days.

Investigation overview:

• HMRC has up to 12 months to open an enquiry; checks affect roughly 17% of claims and take around 246 days to resolve.
• Inspectors may request contemporaneous records, timelines, technical reports, and input from technical staff.
• Complex cases are handled by the R&D Anti-Abuse Unit, with most disputes (around 89%) resolved by agreement.

Response and appeal options:

• Provide clear chronological evidence of the baseline, uncertainties, and work carried out; contact HMRC directly if your agent is unresponsive.
• If you disagree with the outcome, you can request a statutory review, use alternative dispute resolution, or appeal to the Tax Tribunal within 30 days.

Correcting overclaimed relief and facing HMRC penalties

If you discover a mistake after submission, you can amend your Company Tax Return or use HMRC’s online service to disclose the error before an enquiry begins.

Consequences of inaccuracies:

• Discovery assessments: HMRC can issue an assessment after the 12-month window if information was withheld or the error resulted from careless or deliberate behaviour.
• Repayment: Overpaid relief must be paid back to HMRC with interest.
• Behavior-based penalties: Fines depend on the nature of the error:

– Reasonable care: No penalty for genuine mistakes.

– Carelessness: A percentage of the lost tax for failing to take reasonable care.

– Deliberate: Significantly higher penalties for intentional errors.

– Deliberate and concealed: Maximum penalty brackets and potential criminal prosecution.

Practical steps to reduce your risk of an HMRC R&D enquiry

Proactive governance minimises the likelihood of a lengthy HMRC investigation.

Prevention strategies:

• Advance assurance: First-time SME claimants can apply for this scheme to guarantee claim acceptance, provided the final submission aligns with the agreed application.
• Contemporaneous records: Maintain weekly or monthly logs tracking technical uncertainties, testing methods, staff time, and specific costs as they happen.
• Careful agent selection: HMRC does not regulate tax agents. Avoid operators demanding large fee percentages without explaining technical criteria. Ensure they are registered for Anti-Money Laundering supervision, as legal liability rests entirely on your company.

FAQs

What triggers an HMRC R&D tax credit enquiry?

HMRC may open an enquiry after reviewing your Additional Information form. Common triggers include ineligible sectors (e.g. retail or hospitality), unclear evidence of technical uncertainty, unusual spikes in spend, or high-risk agents.

How do I respond to an HMRC R&D tax credit enquiry?

Respond within the deadline and provide clear technical and financial evidence, including records, project notes, and explanations from competent staff. Specialist advice is often recommended.

Can I use an agent to submit my R&D claim?

Yes. Most companies do, but HMRC does not regulate agents. You remain fully responsible for your claim, so choose carefully and ensure all submissions are accurate.

R&D relief remains valuable, but HMRC scrutiny is increasing. Strong documentation and compliance are essential, and professional support can help if an enquiry arises.

This guide provides general information only and does not constitute legal advice.

If HMRC challenges your claim or applies penalties, Qredible’s specialist solicitors can help you defend your position and protect your outcome.

KEY TAKEAWAYS:

• Strict eligibility rules apply: The project must achieve an advance in science or technology and overcome genuine technical uncertainty; routine upgrades do not qualify.
• More compliance requirements: A detailed Additional Information form must be submitted digitally, and first-time claimants must notify HMRC in advance.
• Increased HMRC scrutiny: Compliance checks have risen sharply (around 9,700 in a year), with errors potentially leading to repayment and penalties.