How to prepare for HMRC enquiries into R&D tax claims

Research & development (R&D) tax relief remains an important source of non-dilutive funding for innovative UK businesses, but HMRC continues to scrutinise claims closely.

Enquiries increased after HMRC launched its volume-led approach in 2022, targeting SME claims due to historically high levels of error and fraud. That approach has now shifted towards more targeted enquiries, focusing on larger, more complex or higher-risk claims.

While claimants may now face less generic questioning, enquiries are likely to be harder to answer if the claim was not prepared properly. With AI tools and R&D summarisation pilots rolled out across 28,000 workers, HMRC is better equipped to review and challenge claims at scale.

This article outlines the practical steps your business can take to prepare for an enquiry, ensuring your claims are robust, transparent, and fully compliant.

What is an HMRC R&D enquiry?

An HMRC R&D enquiry is a compliance check into your company’s R&D tax relief claim. It can range from a request for further information to a detailed review of your technical and financial evidence. The purpose is to test whether the claim meets the relevant R&D tax relief criteria.

How to prepare your claim for an HMRC R&D enquiry

A well-prepared claim is a strong claim. Taking the right steps from the outset will significantly reduce the risk of an enquiry and give you peace of mind.

Documentation is your foundation

HMRC places significant emphasis on contemporaneous documentation: records created when the R&D work was undertaken.

• Project documentation: This includes detailed project plans, design documents, JIRA/Github logs, technical specifications, and records of iterations or failed attempts.
• Contemporaneous records: Keep detailed minutes from meetings, site diaries, and logs of technical challenges and how they were overcome. This provides a clear audit trail.
• Financial records: Ensure your financial records, such as general ledgers, payroll data, and supplier invoices, are meticulously organised and can be clearly linked to the qualifying R&D expenditure.

Technical narrative: The 'what' and 'why'

A clear, well-structured technical narrative is often the first thing HMRC will review. It should explain, in plain English, how the project meets the R&D tax relief criteria.

• Technical baseline: What was already known or available at the start, and why that existing knowledge or capability was not sufficient.
• Technical advance: Detail the new knowledge or capability your project sought to achieve. This is crucial in highlighting how your project sought an advance.
• Technical uncertainty: Identify the specific scientific or technological uncertainties and why a competent professional could not easily resolve them.
• Work undertaken: Describe the specific R&D activities undertaken to resolve the uncertainty. This includes methods, approaches, trials, modelling, and analysis.

Financials: The 'who' and 'how much'

The financial side of your R&D claim needs to be as robust as the technical aspect.

• Cost segregation: Accurately separate qualifying R&D costs from non-qualifying costs. Be prepared to justify how you have apportioned costs for staff, consumables, subcontractors, EPWs, software licenses, and cloud computing and data licenses. HMRC expect to see sound reasoning and a structured methodology.
• Staffing records: Maintain records of the staff involved in the R&D project, including their roles, qualifications, and the time they spent on qualifying activities.
• ERIS calculations: Retain working papers supporting R&D intensity and eligibility. Northern Ireland claims should be reviewed carefully against the NI-specific rules.
• Contracts: Review customer and supplier contracts against the merged RDEC contracted-out R&D rules to confirm who is entitled to claim. Retain the contracts and supporting evidence.

What to do if you receive an enquiry

If you receive a letter from HMRC, do not panic, but do not treat it as an admin exercise.

1. Engage a specialist: Your first step should be to contact an R&D tax specialist. They can review the enquiry letter, advise you on the best course of action, and act as a professional intermediary with HMRC.
2. Review your claim: A specialist will help you thoroughly review your original claim and gather any additional information HMRC has requested.
3. Prepare your response: Your specialist will then help you compile a comprehensive response, presenting the technical and financial evidence in a clear, compelling manner.

We’re here to help

Successfully navigating an HMRC R&D enquiry comes down to preparation and a robust approach to compliance. By ensuring your claims are built on a foundation of solid documentation and a clear technical narrative from the outset, you can give your business the best possible chance of a positive outcome.

Azets has a dedicated team of R&D tax specialists who can help you prepare a robust claim and, if an enquiry should arise, defend your position.

If you would like support preparing for an enquiry or responding to HMRC, speak to our team today.