HMRC has announced a significant shift in its approach to R&D Tax Relief compliance.
After years of high-volume, broad-brush enquiries concentrated on SMEs, the tax authority will now focus its efforts on larger, more complex claims.
Here’s what’s happening, why it matters, and how to make sure your claim is ready.
How is R&D Compliance Changing?
At the recent R&D Consultative Forum (RDCF), the twice-yearly meeting of tax inspectors and consultants regarding R&D Tax Relief, HMRC announced it would refocus compliance efforts on Research & Development Expenditure Credit (RDEC) claims, having successfully reduced non-compliance among small and medium-sized businesses.
As part of this move, the tax authority will wind down the Independent and Small Business Compliance unit (ISBC), the department responsible for the aggressive, volume approach to compliance that has dominated the R&D landscape for the past few years.
Its resources, including, potentially, personnel, will be redirected to the Wealthy and Mid-sized Business Compliance unit (WMBC).
This means three things.
First, the era of the generic, templated enquiry letter is coming to an end.
Second, for SMEs, the likelihood of receiving a compliance check is falling. But it is not zero.
Third, for mid-sized and larger companies claiming under the RDEC scheme, the probability of scrutiny is increasing, and WMBC inspectors, who tend to engage more substantively with claims, will be doing the scrutinising.
What About the VCSO?
There have been reports of letters being sent by a new HMRC body called the Volume Compliance and Shared Operations team (VCSO).
Despite what at least one HMRC inspector implied, the VCSO does not appear to be a straightforward rebrand of the ISBC. Its remit is high-volume data matching and mass processing for general tax purposes, not just R&D Tax Relief.
If you are planning to or are in the process of submitting an R&D claim, the message from HMRC is that you don’t need to worry about it being flagged for automated rejection by AI.
Indeed, the only time you would likely deal with the VCSO regarding R&D Tax Relief is if you uncover an error in your claim and need to submit a voluntary disclosure.
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Why is HMRC Doing This?
In 2022, HMRC began an aggressive compliance crackdown in response to rising levels of fraud in R&D Tax Relief claims. A genuine issue, which, it is estimated, at its height, cost taxpayers more than £1 billion per year.
Among other measures, the tax authority adopted its now infamous volume approach to compliance. This strategy favoured automation and scale over precision and nuance, allowing HMRC to increase the enquiry rate from around 1% to over 20%.
The volume approach was largely undertaken by the ISBC’s Campaigns and Projects Team, which was primarily staffed with caseworkers with little to no experience scrutinising R&D Tax claims.
The collateral damage was considerable. Legitimate claimants faced computer-says-no obstinence, undue scrutiny and even outright rejection. This damaged confidence in the scheme and deterred eligible companies from filing. According to HMRC statistics, SME claims fell 31% in the 23/24 tax year, while the amount claimed through the SME scheme fell 29%.
Nevertheless, the crackdown did reduce non-compliance. HMRC estimates that between the 21/22 and 24/25 tax years, the cost of non-compliance in SME claims fell from £1.2 billion to £339 million, a decrease of more than 70%.
Having deemed its crackdown successful, HMRC is turning its attention to larger filings, where the value of individual claims is higher, and the cumulative financial risk is significant.
What Does This Mean for Companies Applying for R&D Tax Relief?
For SMEs not in an Enquiry
For SMEs, this is good news.
The chances of facing an enquiry have fallen, and with HMRC doing away with one-size-fits-all enquiry letters, future investigations will be more relevant to companies’ actual development work. This should make robust claims easier and faster to defend, especially if you have help from our Enquiry Support experts.
That said, a lower enquiry rate is no reason to lower standards. HMRC’s expectations regarding key documentation, such as the additional information form (AIF), have not changed.
If your claim is robust and clear, it will be far less likely to attract an enquiry and all the headaches that go with it.
SMEs in an Enquiry
If you are currently mid-enquiry with the ISBC, the process should continue unaffected by the transition.
It is worth reviewing your claim preparation process to ensure it is specific and well-evidenced, to avoid enquiries in the future.
Even though enquiry rates for SMEs are falling, a higher standard of documentation is your best protection.
Mid-sized and larger RDEC claimants
For larger companies, the risk of facing an enquiry is at an all-time high.
Enquiries that are launched will be more precisely targeted, taking issue with specific projects and cost lines within your claim, requiring you to offer an effective defence.
Financial and technical leaders will need to work harder to ensure their claims are fully compliant, well-evidenced and easy to defend, if they want to avoid the consequences of an enquiry:
- Long funding delays
- Reduced claim size
- Business disruption
- Committing expensive resources to defending your claim
- Repaying relief that has already been invested
- Damaged reputation with HMRC
- Cashflow issues
Because of this, claim preparation support from an experienced R&D Tax Relief consultant, especially one offering free, comprehensive Enquiry Support, like GrantTree, may offer an even greater ROI.
Key Tips for Staying Compliant
So, how do you ensure that your submission is compliant, evidenced and defendable?
1. Focus on Qualifying Advances
The scheme doesn’t reward market novelty, only attempts at technical or scientific advance. It doesn’t matter how great the product is. If it’s been built using existing technical or scientific knowledge and routine development practices, it will not qualify.
This is one of the first areas a WMBC inspector will probe; they are experienced enough to distinguish commercial innovation from the technical or scientific advance the scheme requires. So make sure your claim is grounded in that distinction from the outset.
2. Be Clear About Your Baseline
Ensure the baseline you describe in your AIF clearly and accurately establishes the publicly available, field-level state of the art at the beginning of the project and avoid hyperbole.
Avoid sweeping statements like ‘nothing existed’ or ‘no existing technologies or third-party tools solved this issue.’ Name specific tools and detail their limitations. Describe the theory you may be trying to make a reality, and name the difficulties in doing so.
A vague or uncredible baseline is one of the most common triggers for deeper scrutiny. A named inspector will test this directly, so specific references to named tools and their documented limitations are essential.
3. Describe a Technical Uncertainty
Ensure you’re describing technical uncertainty, not a technical challenge.
A technical challenge is exactly that. It may be difficult, resource-intensive and time-consuming, but you’re confident of a resolution.
A technical uncertainty, meanwhile, has no guarantee of a successful outcome and requires consistent methodological experimentation to explore and resolve.
WMBC inspectors are well-versed in this distinction. Be prepared to evidence that the outcome of the work was genuinely in doubt, and that resolution came through systematic experimentation, not the application of existing knowledge.
4. Pick the Right Competent Professionals
Finally, ensure your competent professionals can demonstrate qualifications and/or experience in the relevant domains.
This is crucial. No matter how smart or gifted your competent professionals may be in every other area of life, if they are new to the field in which the claim is being made, it will seriously undermine your ability to successfully defend the claim at enquiry.
At WMBC level, a named inspector may engage with the competent professional directly, ensuring their credentials are documented and domain-specific is an absolute must.
Let Us Keep You Compliant
Whether you’re looking to ensure your claim is robust and defensible, or need help to prove your eligibility and liberate your funding from an active enquiry, my colleagues and I at GrantTree can help.
We have 15 years of experience filing and defending R&D Tax Relief claims and have unlocked over £500 million in cash credits and tax relief for our clients. We have the tax and technical expertise to ensure your claim is fully compliant and to prove your eligibility to even the most discerning tax inspectors.
To learn more about how we can help you, just get in touch.
