R&D Tax Enquiries
What are R&D tax enquiries and is help available?
HMRC have drastically changed the way they process and investigate tax returns which include R&D tax credit claims. The last few years has seen a sea-change in this area, which had become susceptible to rogues purporting to be R&D tax specialists. It has been for this reason that HMRC blocked thousands and thousands of R&D tax credit relief claims, but they did not investigate and progress them promptly or on a one to one basis as one would have expected.
HMRC’s stance and actions should be taken seriously, because there have been criminal tax investigations in this space too, seeing some arrests too where HMRC suspected some people were holding themselves out to be R&D claim specialists but instead encouraged and/or facilitated fraudulent R&D claims.
From experience, we know HMRC has been running projects to catch all (not target) businesses making claims, by sending out bulk ‘nudge’ letters to get business owners’ and company directors’ attention, as well as opening r&d tax enquiries, e.g. formal compliance checks / enquiries or conducting more serious investigations. It is important to remember that business owners and directors remain responsible for their R&D tax claims irrespective of whether they relied on advice/input from a firm holding itself out as being an R&D specialist.
Why are HMRC so concerned?
R&D tax relief advice was and remains un-regulated, which spurred on so many unscrupulous would-be advisers.
Error and fraud in R&D tax relief claims was estimated by HMRC to be 16.7% of all claims made in 2020/21, totalling some £1.13 billion, having significant increased. However, HMRC reported the estimated figure to have reduced to 7.8% for 2023/24; indicating that their in-depth and intrusive compliance activities had made a major dent in this market.
This is not to say that all R&D tax claims are fraudulent, certainly HMRC’s own figures recognised that ‘errors’ made up a large proportion of them. Some of these will be wholly innocent and others will be due to not taking enough care. Anecdotal evidence suggests that the lack of proper knowledge about making claims and the strict criteria (but still seeing tax refunds) had encouraged spurious R&D would-be advisers to take advantage of businesses. Hence the explosion in the number of R&D tax enquiries.
In 2020, six people were arrested after an investigation into a multi-million-pound R&D tax relief fraud scheme. More recently though – in October 2024 – HMRC searched/raided multiple locations as part of an ongoing investigation into more alleged fraudulent activity leading to an increase in the number of r&d tax enquiries.
What has HMRC done to safeguard its position and assist businesses?
Other than the obvious fierce crackdown on all R&D tax claims made, HMRC introduced a PAYE/NICs cap, updated its guidance and added a new supplementary CT600L page submission requirement.
HMRC has been increasing its resources in this area too and thus its capacity to investigate potential non-compliance. This included an anti-abuse unit in July 2022 with a focus on identifying ‘deliberate’ non-compliance and ‘criminal’ activity. The Fraud Investigation Service (FIS) also has a dedicated team focusing on R&D tax claims and managing wider projects where fraud may be suspected. There are of course other directorates at HMRC carrying out R&D tax enquiries.
The most prolific change was the introduction of having to pre-notify HMRC of R&D tax claims in advance, for accounting periods commencing on or after 1 April 2023. This ensures HMRC know much more, and more quickly, so that a strategic response can be considered as well as specific feedback given to businesses making claims. See more here about what HMRC expect: https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief
So is all lost?
No, careful management of enquiries that might be stuck is recommended, as one must be able to get HMRC’s attention and start making progress towards a conclusion. This may involve forcing a re-think, having a statutory Independent Review and/or utilising the ADR mechanism or assistance from the First-tier Tribunal. Don’t forget, there is always the opportunity to amend existing R&D claims before HMRC commence a formal investigation.
Working with HMRC remains the best way forward, and avoids locking heads unnecessarily. However, businesses should be prepared to ‘push’ if HMRC is ignoring them or doesn’t understand the basis of the R&D tax claims made.
R&D tax investigations are sometimes complex and so specialist advice is required; which we can provide with the assistance of industry recognised technical experts. However, robust management of enquiries is a must, to ensure HMRC are doing what they can, not what they feel like. That’s where we come in!
Also, it is possible to make a voluntary disclosure of errors to HMRC, and in certain, more serious circumstances receive an assurance one would not be investigated criminally with a view to prosecution.
Volunteering information and co-operating with HMRC’s enquiries, and even when making a voluntary disclosure gives one the best opportunity to expedite a conclusion and reduce exposure to statutory interest and reduce penalties.
How can we help with R&D tax enquiries?
If you or your client has been contacted by HMRC about an R&D tax relief claim then we can help steer that investigation, to keep it on track and focused, to bring about a conclusion. We will fully review the R&D claim and any underlying report and evidence, so that we robustly defend to claim made. We are not in the business of procrastinating.
Importantly, we deliver that all-important trusted ‘buffer’ between our clients and HMRC during their in-depth and intrusive investigations and in all voluntary disclosures too.
Get in touch to learn more about how Amit and the Tax Investigations and Disputes team have successfully guided clients through the WDF disclosure, compliance checks, COP9 or COP8 investigation processes.
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