What penalties apply to an incorrect R&D claim?

Penalties for an incorrect R&D claim follow the same behaviour-based framework as other Corporation Tax Self Assessment inaccuracies, set out in Schedule 24 Finance Act 2007. There is no separate, harsher R&D-specific penalty regime, but HMRC's heightened scrutiny of the sector means penalties are charged more often than in the past.

The starting point is always behaviour: whether the company took reasonable care, was careless, or acted deliberately, and, if deliberate, whether the error was also concealed. The penalty percentage is then applied to the potential lost revenue — broadly, the extra tax or credit the inaccuracy caused.

Whether the disclosure was prompted (only after HMRC raised the issue) or unprompted (volunteered before HMRC intervened) significantly affects where in the range the penalty falls, alongside the quality of cooperation given during any enquiry.

Reasonable care means the company or its adviser genuinely believed, on a defensible reading of the rules, that the work met the qualifying definition and the costs were eligible, even if HMRC later disagrees. No penalty arises here, though the relief itself can still be removed.

Carelessness typically applies where a claim was based on a generic narrative without proper technical review, or costs were included without checking eligibility, and a reasonably diligent company or adviser should have caught the error.

Deliberate behaviour, and the more serious deliberate and concealed category, applies where claims were knowingly inflated or fabricated — for example inventing projects, exaggerating uncertainty, or including costs known not to qualify. HMRC has pursued a growing number of R&D cases on this basis, including some referred for criminal investigation.

As the director, you cannot simply point to a third-party adviser to avoid a penalty; HMRC expects the company to have taken reasonable steps to check the claim's accuracy before submission.

If you now suspect a past claim was significantly overstated, making an unprompted disclosure to HMRC before it opens an enquiry can substantially reduce any penalty compared with waiting to be caught.

Cooperating fully once an enquiry starts — providing complete, timely and accurate information — also reduces the penalty within whichever behaviour band applies.

In addition to repaying any credit and interest, a penalty at the higher end of the deliberate and concealed range can, in principle, add up to the full amount of the tax lost again, effectively doubling the exposure.

Professional fees to manage a penalty negotiation, particularly around behaviour classification, can be significant, since the difference between careless and deliberate often determines whether the penalty is manageable or severe. Growth plan clients have free tax investigation insurance included to cover this — see /fees.

Getting the behaviour classification challenged where HMRC has been too quick to label something deliberate can materially reduce the final penalty.

Do not accept HMRC's proposed behaviour classification without scrutiny; careless and deliberate carry very different penalty ranges and burdens of proof.

Do not delay making a disclosure once you suspect a problem, since the unprompted reduction disappears the moment HMRC starts asking questions.

Do not assume penalties are unavoidable — reasonable excuse and reasonable care arguments genuinely succeed where the claim was prepared in good faith on a defensible basis.