In recent years, HMRC has significantly increased its scrutiny of R&D tax credit claims, leading to a surge in enquiries and compliance checks for businesses across the UK. While R&D tax relief remains a valuable incentive for companies investing in innovation, the stricter oversight means that businesses must ensure their claims are fully compliant to avoid delays, reductions, or even rejections.

So, why is HMRC tightening its review process, and how can businesses best prepare for an R&D enquiry? In this article, we explore the reasons behind the increased scrutiny and the steps you can take to protect your claim.

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Why is HMRC Increasing R&D Tax Credit Scrutiny?

Several key factors have contributed to HMRC’s increased focus on R&D tax credit claims:

1. Rising Cases of Fraudulent and Inaccurate Claims

The UK government has identified an increase in fraudulent or exaggerated claims, with some companies misrepresenting their activities to claim tax relief they are not entitled to. As a result, HMRC has introduced more rigorous checks to ensure only legitimate claims are approved.

2. Surge in R&D Claims

With the growing awareness of R&D tax relief, more businesses are making claims than ever before. While this is a positive development, it also means HMRC must dedicate additional resources to assessing whether all claims meet the strict eligibility criteria.

3. Incorrect Interpretations of Qualifying R&D Activities

Many businesses, and even some advisors, misunderstand what qualifies as R&D under HMRC’s guidelines. Claims that lack sufficient technical justification or do not align with the BEIS definition of R&D are more likely to be flagged for further review.

4. Changes to the R&D Tax Relief Scheme

Recent legislative changes have been introduced to prevent abuse of the system, including measures such as:

• Stronger checks on SME claims to prevent fraudulent activity.
• A cap on payable tax credits for SMEs to limit excessive claims.
• Mandatory pre-notification for some first-time claimants from 2023 onwards. These changes mean that HMRC is paying closer attention to claims, especially from businesses making their first submission or claiming significantly larger amounts than before.

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How to Prepare for HMRC’s Increased Scrutiny

To avoid delays, reductions, or rejections of your R&D tax credit claim, it’s crucial to take a proactive approach. Here’s how your business can prepare:

1. Ensure You Clearly Demonstrate Technical Uncertainty

HMRC wants to see evidence that your project involves a genuine advance in science or technology and that your team encountered technical uncertainties that could not be easily resolved by a competent professional in the field.

• Clearly describe the problem your business faced.
• Explain the challenges in achieving a solution.
• Provide evidence of experimentation and development.

2. Keep Comprehensive Records of R&D Activities

A lack of detailed documentation is a common reason for HMRC enquiries. To avoid this:

• Maintain clear records of project developments, technical challenges, and experimental work.
• Keep dated meeting notes, technical reports, and test results.
• Ensure that financial records accurately reflect the costs incurred in R&D activities.

3. Accurately Categorise R&D Expenditure

HMRC is paying close attention to how costs are allocated within claims. Businesses must ensure:

• Only eligible costs (such as staff wages, materials, and software) are included.
• Subcontractor costs are correctly classified and meet HMRC’s qualifying criteria.
• Staff working on both R&D and non-R&D activities have time allocations correctly recorded.

4. Work with a Specialist R&D Tax Consultant

With HMRC tightening its compliance checks, working with a specialist R&D tax credit consultant can help ensure your claim is fully compliant and defensible.

• An expert will review your claim for accuracy before submission.
• They can help you respond to HMRC enquiries efficiently and effectively.
• They ensure your claim is presented in line with HMRC’s latest expectations.

5. Be Prepared for an HMRC Enquiry

Even with a fully compliant claim, HMRC may still request further clarification. If you receive an R&D tax credit enquiry, take the following steps:

• Respond promptly within the given timeframe.
• Provide clear, factual evidence that aligns with your original claim.
• Seek expert assistance if needed to handle HMRC’s queries professionally.

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Final Thoughts

With HMRC increasing scrutiny on R&D tax credit claims, businesses must be more diligent than ever when preparing their claims. By ensuring compliance, maintaining proper records, and seeking expert guidance, you can reduce the risk of an enquiry and secure the tax relief your business is entitled to.

At R&D Enquiries, we specialise in helping businesses navigate HMRC’s R&D tax credit process, ensuring they submit compliant claims and successfully respond to enquiries. If you need expert support, get in touch today.

👉 Contact us today to discuss your R&D tax credit claim and protect your business from unnecessary HMRC scrutiny.