Receiving a letter from HMRC regarding your RDEC claim can be a daunting experience. However, it's increasingly common, and understanding what to expect and how to respond effectively can significantly ease the burden and help achieve a positive outcome.
The best way to navigate an HMRC enquiry is through proactive preparation and transparent communication. This will be easier if you have maintained meticulous records of your R&D projects from the outset, including detailed technical narratives, project documentation and precise financial allocations. If you don’t have these you will need to compile them for the Enquiry, because it’s essential to provide comprehensive and accurate information, beyond what HMRC may already have.
And before you get started, be sure to follow HMRC instructions on agreeing to email communications as this will lead to a more efficient communications process. If your claim is of significant value consider hiring a specialist R&D Advisor to assist you.
Who Handles R&D Enquiries at HMRC?
HMRC has dedicated R&D compliance teams responsible for handling enquiries. Historically, these were specialist R&D units, and now, depending on your company's size and complexity, your enquiry might be handled by:
Individuals and Small Business Compliance (ISBC): This team often handles claims from smaller businesses and employs a more volume-based, desktop approach to compliance checks, focusing on efficiency and speed.
Wealthy & Mid-sized Business Compliance (WMBC): For larger SMEs and mid-sized businesses, enquiries may fall under WMBC.
Large Business (LB) Unit: Very large companies typically have their R&D enquiries handled by the LB unit, often with support from specialist R&D personnel.
Don’t be afraid to stand up for your R&D claims
The experience of an enquiry can vary depending on which unit is handling your case and their specific approach. The most challenging unit to deal with, based on recent evidence, is the Individuals and Small Business Compliance (ISBC) team.
They have been at the forefront of HMRC’s stepped-up compliance check routine which while being rooted in tackling fraud, has over the past two years been characterised by low technical expertise, poor communications, template-driven reviews and overloaded staffing.
This is born out by our own first-hand experience, in too often finding the quality of HMRC’s compliance checks to be less than optimal, with HMRC misinterpreting guidelines or maintaining an unfairly obstinate position of rejection, or repeating the same questions over several letters.
In the face of this, we believe the most efficient approach is to do a very thorough response to the first HMRC letter, then if there is repetition in follow up letters and you feel a question has already been adequately addressed, refer HMRC back to your original answers. And continue to defend your claim as far as in necessary.
The Stages of an HMRC Enquiry
An HMRC R&D enquiry typically follows a structured process:
Initial Contact (Enquiry Letter): The process begins with a formal letter from HMRC stating that your R&D claim is under review. This letter will outline the specific areas of concern, ask for clarification or additional information, and set a deadline for your response (typically 30 days). The questions will usually be a mix of financial and technical queries.
Information Gathering and Response: This is your critical first step. You must carefully read the letter, understand each question, and gather all relevant documentation. Your response should be clear, concise, and directly address each of HMRC's queries. Provide detailed explanations for the scientific or technological advance and uncertainties, how they were overcome, and how the claimed costs relate to these qualifying activities. Ensure your response is consistent with your original claim.
Further Questions or Meeting: It's common for HMRC to have follow-up questions after your initial response.This request might come in another letter or HMRC might request a meeting or conference call with your finance and technical teams to discuss the projects in more detail. If you're not offered a virtual meeting to present your case, request one. Recent expereince is that the ISBC team is very reluctant to hold meetings, but it's still worthwhile requesting one as ban be favourable to your case, if you end up in a dispute. The other teams are more likley to suggest a meeting. Be prepared to explain your R&D activities in accessible language, linking them directly to the R&D criteria, as set out in online R&D Guidelines.
Resolution or Dispute: Based on your responses, HMRC will make a decision. Ideally, they will be satisfied and close the enquiry with no adjustments. Other possible outcomes include:
Adjustment to the Claim: HMRC may reduce the value of your claim if they deem certain activities or costs do not qualify.
Rejection of the Claim: The entire claim may be rejected if HMRC concludes it does not meet the R&D criteria. Rejection means that 100% of the claim benefit must be repaid.
Penalties: If significant errors or deliberate misrepresentations are found, besides 100% of the claim benefit being repayable, HMRCcan also impose penalties based on the claim value, ranging from 15% for careless mistakes to 70% or more for deliberate misrepresentation.
If you disagree with HMRC's decision, you have avenues for appeal, including:
Appeal Letter: You can formally submit a written appeal against the decision, stating your reasons and evidence, usually within a 30 day deadline.
Statutory Review: If your initial appeal doesn't resolve it, HMRC offers an independent internal review by a different, senior officer.
Alternative Dispute Resolution (ADR): A voluntary mediation process with an impartial third party to help resolve the dispute without tribunal. Can be used at various stages.
First-tier Tax Tribunal: The final independent court of appeal if all other attempts to resolve the dispute with HMRC are unsuccessful.
Mitigation tips
Engage qualified advisers with deep R&D claim experience.
Always respond by the deadlines set by HMRC, or telephone the number provided to seek an extension (which may or may not be granted).
Document technical and financial evidence thoroughly and provide documentary evidence, beyond the AIF.
Be proactive in requesting meetings and escalate where necessary (statutory reviews, dispute resolution etc.).
Maintain detailed correspondence logs, especially if HMRC requests duplicate information.
Check R&D qualification criteria.
Read a real life example of a Compliance Check: A Case Study of Persistence.