HMRC enquiries – what are they and why do they happen?

R&D tax credits are a form of self-assessment. As administrators of the R&D tax-credit incentives, it is HMRC’s duty to make sure the government funding is being accurately distributed to eligible businesses in the correct amounts.

Currently, there is no standardized format for claimants of R&D tax credits; HMRC can therefore seek more information, clarity, or evidence as part of processing or approving any claim. This information-gathering process in support of an R&D tax-credit claim is known as an enquiry. Enquiries can be issued at the point of claim submission, or reviewal by HMRC.  Commonly though, enquiries are issued after a claim has been paid and processed. HMRC call this operating on a pay-now-process-later basis.

How common are enquiries?

As part of an effort to reduce fraud and error in the incentives, HMRC enquiries are becoming increasingly common; and any business making an R&D tax-credit claim should be prepared to inherit a potential ‘evidential burden’ associated with evidencing the qualifying expenditure within their claim. This also means being confident in the boundaries of your R&D projects and the governing legislation – as well as your records for R&D, including people’s time spent resolving ‘scientific or technological uncertainty’. Specialist advisers will be able to help with this.

Abstract legislative terms such as the ‘resolution of scientific or technological uncertainty’ are purposefully broad – enabling innovation of all kinds across all sectors to be captured in the government-backed incentives. Yet by the same breadth, the abstraction also creates legislative ‘grey areas’ which have been variously misinterpreted or exploited in recent years. An HMRC enquiry may be a random spot-check; but all companies should be prepared for additional scrutiny in order to prove their claim is technically accurate. The boundaries of your R&D – how you codify, qualify, and quantify your efforts – are often probed under enquiry.

R&D tax-credit claims are being subjected to increased scrutiny (with good reason); and it might be reasonable to assume that HMRC’s enquiring spotlight will continue to shine with greater range and intensity as the R&D tax credit incentives enter their second decade of existence. And it’s worth noting that enquiries can be long, laboursome and technically-demanding. Some enquiries take years to be resolved, and HMRC can impose penalties if they detect serious errors in a claim.

What is the purpose of an enquiry?

As we say, the purpose of an enquiry is to ensure the correct values have been accurately identified and that the correct people in your business have – with whatever specialist support they choose to engage – made the correct assessments about their R&D expenditure. We always recommend partnering with a specialist adviser to make sure your claim contains all the relevant expenditure while remaining robust and able to withstand any additional scrutiny from HMRC.