With thousands potentially on the line, having your R&D tax credit claim selected for a HMRC compliance check can feel daunting. That’s why our tax accounting specialists are sharing exactly what you need to know in this situation.

Need our team of R&D tax credit specialists to assist? We’re always on hand to help with claims, from start to finish. 

Simply get in touch and we’ll be happy to talk through the particulars of your claim.

Otherwise, here’s our simple guide for how to get your claim back on track. With answers to burning questions like how long does a HMRC compliance check take, what should you not do during the review and how to handle every step of the response process. 

What is an HMRC compliance check?

Essentially, when you submit an R&D tax credit claim, HMRC will scrutinise it to make sure your claim is eligible and legitimate. 

While most people this vital tax relief as intended, the minority who fraudulently use tax avoidance schemes cost the taxpayer a whopping £1 billion every year. That’s why HMRC are increasingly requesting supporting information to verify R&D claims – known as compliance checks.

You might be facing an HMRC compliance check on your R&D claim this year, even if you haven’t in past years, because of the government’s newly enhanced approach to R&D compliance in 2024.

Why has your claim been selected?

While it might not be a great feeling to have been selected for checks, bear in mind that it doesn’t automatically mean that there’s something wrong with your claim. 

With new R&D tax credit restrictions in place, HMRC conducts checks for a variety of reasons, such as:

  • Random selection as part of their standard verification process
  • Your industry has been identified for sector-wide reviews
  • The size of your claim – sometimes a large claim will warrant an extra level of verification
  • A significantly larger claim amount compared to previous years
  • Claims from industries that HMRC considers unlikely to conduct qualifying R&D
  • Incorrect or outdated SIC (Standard Industrial Classification) codes that don’t align with R&D activities
  • First-time claims
  • Claims with costs that appear unusual for your industry or business size

As you can see, there are a whole host of reasons HMRC might want to seek some additional verification that can still result in a successful claim. So remember to keep a cool head, despite the circumstances.

What happens during a HMRC compliance check?

If you haven’t had an R&D compliance check before, you might be – understandably! – concerned by what it entails. We’ll take you through exactly what will happen next.

HMRC make initial contact

There’s no room for doubt about whether you’re undergoing extra checks. You’ll know because you’ll receive a formal letter from HMRC stating that your R&D claim is under review. 

The claim is explained

HMRC will then give you details about what they’re checking. This will include any specific questions about your claim and set a hard deadline for your response (usually 30 days).

You send over any required information

When responding to the claim, HMRC will usually let you know exactly what kind of supporting evidence you need to include.

HMRC will usually ask for one or more of these things:

  • Detailed explanations of your R&D work
  • Evidence of how it qualifies for tax relief
  • A breakdown of project costs
  • Other supporting documentation

How to handle your compliance check

1. Check the timeline

Before doing anything else, verify that HMRC’s enquiry was issued within their 12-month window following your tax return submission. 

Similar to the standard R&D claim deadline, meeting compliance check timeframes is crucial as it determines whether you need to respond.

2. Respond promptly

Call the HMRC compliance officer named in the letter to introduce yourself as the point of contact and establish a professional working relationship. If you need more time than the standard 30-day window, you should also request this during your initial conversation.

3. Gather your documentation

It’s now time to thoroughly gather all supporting documentation needed in your response to the HMRC compliance check. 

This should include detailed project documentation, financial records showing R&D expenditure, staff timesheets or time allocation records, relevant supplier invoices, and your original claim documentation. 

Tip: Pay particular attention to gathering evidence that demonstrates how your work couldn’t be easily solved using existing knowledge or standard practices. This will help to prove why innovation was necessary.

4. Give clear & detailed responses

Respond to each of HMRC’s questions with clear and detailed explanations. Link your activities to R&D criteria and explain technical aspects in accessible language.  Ensure you provide evidence for any and all costs claimed. 

Focus on demonstrating why each project required research and development rather than routine problem-solving.

5. Be prepared for further questions

Don’t assume that once you’ve submitted your response the case will be closed. Sometimes HMRC will come back with additional rounds of questions and requests for more detailed evidence. Avoid this by giving clear but comprehensive evidence from the start.

What not to do when faced with an HMRC compliance check

Feeling nervous about the process? Here’s our list of no-nos. Keep these in mind to get the best outcome possible.

Procrastinating on an initial response 

That HMRC letter might look daunting, but leaving it unopened on your desk won’t make it disappear. Missing the 30-day deadline only makes things more stressful and HMRC less sympathetic.

Half answers

Firing off quick, partial answers just to meet the deadline might sound like a good idea at the time but ultimately HMRC will just come back with more questions. And you’ll only end up dragging the process out.

Changing your story

If your new explanations don’t match your original claim, HMRC will be instantly suspicious of potential fraud. Keep your story straight as they’ll be comparing notes from day one.

Poor record keeping

Good record-keeping isn’t just a box-ticking exercise, it makes life so much easier if HMRC ever has questions. So keep your timesheets, cost breakdowns and technical documentation well organised.

How long does a HMRC compliance check take?

It’s difficult to give a clear estimate on timelines without knowing specific details about your claim and the aspects being checked. Here are some general estimates based on our clients’ experiences to give you a rough timeframe.

Best case scenario: If your documentation is complete and you respond swiftly to HMRC’s initial queries the check might be resolved within a few weeks.

Standard timeline: Most checks take 2-3 months, especially if there are multiple rounds of questions.

Extended cases: More complex situations can take 6 months or longer, particularly if HMRC requires additional evidence, multiple tax years are included in the claim or further technical explanations are needed. 

Delays in responses from either party (you or HMRC) can also add to how long a HMRC compliance check takes overall.

The key to keeping the timeline as short as possible is to:

  • Respond promptly to all HMRC communications
  • Keep channels of communication with HMRC open by making contact with the HMRC compliance officer on your case
  • Provide comprehensive information in your first response – ideally with the assistance of an accountant like Williamson & Croft who have a strong track record of undisputed claims
  • Have all supporting documentation readily available from the off – there’s nothing worse than having to dig highly specific information out of disorganised records

What if you need more time?

While we’d always recommend getting the requested information over to HMRC as quickly as possible within the timeframe they’ve provided, there are exceptions. If you genuinely need more time to gather your supporting information it is possible. 

However, don’t just let the time-lapse. You’ll have a better chance of pleading your case for an extension if you get in touch with your HMRC compliance promptly.

You also have the right to question or challenge aspects of HMRC’s review that seem unreasonable, and even request the check be stopped entirely. This can even be taken to a tribunal review. However, do so with caution, as unsuccessful challenges could result in penalties.

What are the potential penalties from a compliance check?

Unfortunately, poor responses to HMRC can end up with big penalties for your claim, so it pays to be detail-oriented from the start. Here are the different types of penalties you could face.

Error types and their penalties

Careless mistakes: If HMRC determines you didn’t take reasonable care, penalties typically range from 15% to 30% of the tax due

Deliberate errors: When incorrect information is knowingly provided, penalties can rise to 70% of the tax due

Deliberate and concealed: If HMRC believe that errors have been intentionally hidden the penalty can reach a full 100% of the tax due

How to avoid penalties

Being proactive and transparent with HMRC can significantly reduce any penalties, which is why it’s crucial to ensure your R&D claim is accurate from the start. Seek professional advice if you’re ever unsure.

Time to call in the R&D experts?

At Williamson & Croft, R&D tax credits are one of our particular specialisms. If you’re under review from HMRC, get in touch and we’ll be happy to talk through the particulars. 

If you’re considering applying for R&D tax credits, don’t let the possibility of compliance reviews deter you. Our seasoned R&D tax advisors have a reputation for unchallenged claims and meticulous attention to detail and are ready to handle your claim from end to end.

Contact us today to book a meeting with the tax specialists at Williamson & Croft.