Avoiding common R&D Tax relief pitfalls: Five real-world lessons
As the UK’s research & development (R&D) tax relief regime continues to evolve, so too do the challenges and risks associated with making a claim. While HMRC has pitched a move to a more simplified regime, the reality does not quite match up. From tighter deadlines to more complex compliance requirements, businesses and their advisers must be more vigilant than ever.
Below, we explore five real-world scenarios that illustrate what can go wrong and how to avoid costly mistakes.
1. Last-minute amendments and communication breakdowns
In one recent case, a claimant engaged a boutique R&D adviser to prepare a last-minute R&D tax claim and amended tax return. The adviser requested and was provided with draft accounts and tax computation. The main tax agents later issued the final documents to the claimant and submitted the accounts and tax return. During compilation of the R&D claim by the boutique adviser, the claim was not reconciled to the final accounts or tax computation. The result? An incorrect tax position with HMRC, likely missed benefit due to working at such tight deadlines, and potential exposure to penalties.
Our advice: First, check what services your accountant offers in relation to R&D; having both services in house is likely to improve communication and efficiency. If you are using an third party, clear, timely communication between the R&D adviser, you, and your accountant is critical. Leaving amendments to the last minute increases the risk of errors and missed opportunities. Establishing a collaborative workflow early in the process can prevent these issues.
2. Failure to file the Additional Information Form (AIF)
Since August 2023, submitting an AIF has been mandatory for all R&D claims. In cases where claims are submitted close to the statutory deadline, failure to file the AIF, filing the AIF after the tax return, or filing the AIF with an error, can result in automatic rejection. Worse still, by the time HMRC notifies the claimant, the amendment window may have closed - leaving the company with only the complex SP05/01 route to appeal.
Our advice: Always submit the AIF before the company’s return, ensuring it has been diligently reviewed for accuracy and that any information reconciles with the tax return. An incorrect or missed AIF can mean a missed claim.
3. Pre-notification confusion and misinterpreting HMRC guidance
The new pre-notification requirement for R&D claims has introduced significant confusion, particularly as HMRC issued recent communications that its own guidance, published in September 2024, was inaccurate. The legislation states that if a company’s only claim to relief for a period before 1 April 2023 was made in an amended tax return after 1 April 2023, pre-notification is still required; however, HMRC’s guidance implied this was not the case. In recognition of its error, HMRC is permitting companies with claim periods ending in March, April, or May 2024 an alternative route to claim if they initially assumed (based on guidance) that they did not need to pre-notify and so, when the correct guidance was issued, had missed an opportunity to claim.
Our advice: Stay up to date with HMRC guidance and err on the side of caution. If in doubt, submit a pre-notification within six months of the original year-end, or you can choose to complete the claim in full, including submission, prior to the 6 month deadline follow your year end. For year ends March to May 2024, check whether you are eligible to claim via the alternative route.
4. Mismanaging enquiries and missing deadlines
Approximately 20% of all R&D claims receive a compliance check or enquiry from HMRC – far more than before implementation of the AIF – and mishandling them can be costly. In one case, a company failed to formally trigger a request for an independent review of their claim within time limits, as they had incorrectly understood the requirements of the appeals process. The result was a lengthy legislative challenge and a rejected claim.
Our advice: Treat HMRC enquiries with the same urgency as any legal or regulatory matter. Understand the timelines, seek professional advice from an R&D dispute resolution expert, and respond comprehensively and promptly to HMRC’s letters and requests.
5. Incorrect ERIS calculations
The Enhanced R&D Intensive Support (ERIS) scheme offers generous relief for qualifying SMEs - but only if the calculations are accurate. Claims have been rejected due to miscalculations of R&D intensity, often stemming from incorrect treatment of grant income, capitalised costs, misunderstanding of required expenses to include, or errors in reconciling expenditure in the R&D claim within long periods of accounts.
Our advice: ERIS calculations are complex and require a deep understanding of both tax and accounting principles. Use specialist tools or advisers to ensure accuracy, and document your methodology clearly in any submitted R&D report to proactively demonstrate knowledge and process.
Proactive compliance is the best strategy
Each of these scenarios underscores a common theme: the importance of proactive, informed, and collaborative compliance. As HMRC continues to tighten its oversight, businesses must adapt by improving internal processes, seeking expert guidance, and staying ahead of regulatory changes.
If your company is planning an R&D claim - or if you’ve encountered any of the issues above - now is the time to act. A well-prepared claim is not just about maximising relief, it’s about protecting your business from unnecessary risk.
We are here to help
The R&D tax relief scheme, as explained above, can be complex and full of pitfalls. We have supported many businesses with the full claim process, making sure they are fully complying with all HMRC requirements and making their case as robust as possible. If you are considering an R&D claim or have encountered issues with one you are in the midst of trying to process, please get in touch with our specialist R&D Tax Relief team.