R&D Tax Credit Enquiry: What to Do When HMRC Challenges Your Claim

An R&D enquiry letter means HMRC has opened a formal check into your Corporation Tax return, or is querying your claim before releasing any repayment, using its powers under Schedule 18 FA 1998. It does not automatically mean the claim is wrong. HMRC increased scrutiny of R&D claims after finding significant levels of error and fraud in the population of claims made, so many enquiries are risk-based rather than evidence of a specific problem with your business.

The letter should state which accounting period is under review and what HMRC wants to understand. Some enquiries focus narrowly on whether the work meets the definition of R&D for tax purposes; others also probe the cost calculation. Read the letter against the additional information form you submitted, since HMRC's questions usually follow directly from gaps or vague statements in that form.

HMRC opens R&D enquiries for several recurring reasons: a technical narrative that reads as routine software or engineering development rather than an advance addressing scientific or technological uncertainty; cost claims that look disproportionate to the size of the company or the described project; claims prepared by an adviser working on a contingent fee with little client involvement in the technical description; and claims that increased sharply compared with a prior period without explanation.

Sector-wide risk also plays a part. HMRC has run targeted campaigns in areas such as software development claims, and has expanded pre-payment checks generally. Being selected does not mean fraud is suspected; it commonly means the claim sits within a risk profile HMRC checks as standard practice before repayment.

HMRC can request information and documents reasonably required to check the Corporation Tax return, including the R&D claim, using Schedule 36 FA 2008 information notice powers if correspondence does not resolve matters. This can include project documentation, technical specifications, board minutes discussing the work, timesheets, payroll records and evidence supporting subcontractor or externally provided worker costs.

You can question a request that is not reasonably required for checking the claim, and there are rights to appeal certain formal information notices to the tribunal, though not all notice types carry appeal rights. Refusing to engage at all is different from challenging scope: outright refusal without explanation tends to harden HMRC's position and can support a higher penalty later if an error is found.

There is no fixed statutory timescale for an R&D enquiry, and duration depends on the complexity of the technical issues, the completeness of your response and HMRC's caseload. Straightforward queries resolved with clear contemporaneous evidence can close within a few months; enquiries into technically complex, multi-project claims, or those requiring specialist HMRC caseworker input, can run considerably longer.

The enquiry ends when HMRC issues a closure notice under Schedule 18 FA 1998. This confirms the claim as submitted, amends it to a different figure, or denies it. If you disagree, you can request a statutory review or appeal directly to the First-tier Tribunal within the time limit stated on the closure notice.

Penalties for an inaccurate R&D claim fall under Schedule 24 FA 2007, which links the penalty range to behaviour: reasonable care taken despite an eventual error normally carries no penalty, careless inaccuracies attract a lower range, and deliberate inaccuracies attract materially higher penalties, higher still if concealed. Whether the claim was prepared with reasonable care, including proper technical assessment and cost evidence at the time, is central to this.

Where an error is found, a prompt, unprompted disclosure of the problem before HMRC raises it, together with full cooperation once an enquiry starts, can reduce the penalty within the applicable range. HMRC also has power to suspend some careless-behaviour penalties subject to conditions. Repaying the excess relief and interest is separate from, and in addition to, any penalty.

A frequent mistake is treating the enquiry response as a marketing exercise, restating why the product is impressive rather than addressing the statutory test of scientific or technological uncertainty resolved by a genuine advance. Another is submitting cost figures with no supporting timesheets or project records, then trying to reconstruct an apportionment retrospectively once HMRC asks for it.

Companies also sometimes let an adviser respond to HMRC without director input, even though directors and technical staff hold the knowledge needed to answer questions accurately. Missing the response deadline, or providing partial answers that prompt further rounds of correspondence, tends to extend the enquiry and increase costs on both sides.

Consider a software company that claimed SME R&D relief for developing a new data processing feature. HMRC opened an enquiry after the additional information form described the work in general commercial terms without identifying a specific technological uncertainty. On review, the company's technical lead was able to explain, with development logs and internal specifications from the time, why an existing approach did not work and what uncertainty the team resolved.

HMRC accepted part of the project as qualifying but queried costs for a subcontractor who worked on unrelated client delivery as well as the R&D project. Because timesheets had not separated the two, the company had to reconstruct an apportionment using diary evidence and manager confirmation. HMRC reduced the qualifying subcontractor cost accordingly and issued a closure notice amending the claim, without applying a penalty, on the basis that reasonable care had been taken and the correction reflected an honest apportionment difficulty rather than carelessness.