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HMRC's R&D Tax Compliance Checks Explained

A compliance check from HMRC can feel like a death knell for your R&D tax claim. But it doesn’t have to spell the end for your credit.

These checks are designed to ensure that claims are accurate and that businesses are not incorrectly (or fraudulently!) claiming valuable tax relief. Understanding how the process works and what to expect can make the experience less stressful.

HMRC will sometimes choose to open a compliance check if they believe a claim doesn’t fully comply with the rules. This can happen for various reasons, such as inconsistencies in the submission, unusually high claim values, or even being randomly selected.

The first step of a compliance check is receiving a letter from HMRC outlining the scope of the review. This letter will detail what they scrutinise and the specific information they require, such as further explanation of the scientific or technological advancement or details of the competent professional’s credentials.

HMRC could also ask the company financial questions, such as how the payable tax credit was calculated and a breakdown of the qualifying expenditure being claimed, including staffing and sub-contractor costs.

Once the compliance check begins, HMRC will request detailed documentation to support the claim. This could include technical reports, project records, financial details, and other relevant supporting evidence.

If the company has engaged an R&D tax specialist, their expertise can be invaluable in preparing the responses.

Communication is key throughout this process—clear, factual, and well-supported responses can make a significant difference in the speed and outcome of the check. In short, if you have relevant information, don’t wait for HMRC to ask for it; give all information you can as early as possible.

The duration of a compliance check can vary based on the complexity of the claim, the depth of your response and HMRC’s own internal timelines. While some cases may be resolved in a month or two, more complicated cases can extend beyond a year.

To avoid delays, companies should provide comprehensive details from the start of the compliance check. A good rule of thumb is to offer too much information, as this can help clarify any potential issues early on.

It’s important to note that each compliance check is different. Some are resolved after the first letter and some go all the way to First-Tier Tax Tribunal; they can also be resolved at any stage between.

Stage 1 – Initial Letter

Every single claim begins the same way – with a letter from HMRC that requests additional details on the claim. This may be a very specific set of questions, or a wide range of standard questions on all aspects of the claim (some of which you may have already answered in your Additional Information Form).

As emphasised above, you should aim to provide as much information on your R&D tax credit claim as possible at this stage to speed up this process. If all goes well, this could be the first and final stage of your compliance check.

Stage 2 – Follow-up letters

However, if the reviewer is not satisfied with the details provided at the initial stage, they may continue to request further information. This may even happen multiple times.

These questions should zero in on the aspects of the claim that the reviewer isn’t convinced by (for example, they may request specific details about your competent professionals, more information on your advance, or specifics about any connected party costs).

At this stage, HMRC may request you provide evidence of the work done, the costs claimed or anything else they deem relevant to the claim.

Stage 3 – Rejection and Appeal

If HMRC is still not convinced by your responses after a few rounds of questions, they may categorically reject the claim. Fret not; you are able to appeal this rejection and ask for a second review. You’ll know if your claim is rejected as the letter will include a request for you to pay back any tax benefit already received (e.g., a reduction in your CT or any cash credits received).

You’ll also receive a list of questions so HMRC can assess whether any penalties are due. Claims that were made in bad faith or carelessly will be at higher risk of penalties. Using an R&D tax advisor usually demonstrates that you have taken due care in preparing your claim.

You should answer these questions honestly and promptly, to avoid delaying the process. This is not an admission of guilt and if HMRC decides that penalties are due, but later overturns their decision to reject your claim, any penalties will be struck.

When appealing this letter, you should provide a summary of the reasons why you believe the claim is legitimate.

Stage 4 – SOLS

If a company disagrees with the final outcome of a review, the enquiry can be escalated to the HMRC Solicitors Office & Legal Services (SOLS) team. SOLS is responsible for providing legal services for HMRC, independently reviewing claims, and resolving disputes over R&D activities or expenditures under enquiry.

Stage 5 – First-Tier Tax Tribunal

The last option available to a company whose claim is rejected by the SOLS is the First-Tier Tax Tribunal. This stage is relatively lengthy due to the delays in the justice system.

• Filing an Appeal
  • The company must file an appeal to the First-Tier Tribunal (Tax Chamber) within 30 days of receiving SOLS’s final decision.
  • The appeal should include dispute details, supporting documents, and reasons for disagreeing with HMRC.
• Pre-Trial Case Management
  • The tribunal may schedule a case management hearing to clarify issues, set deadlines, and determine if expert witnesses are needed.
  • Both parties submit witness statements, expert reports, and evidence before the hearing.
• The Hearing
  • A judge usually conducts the tribunal, sometimes with additional panel members if technical expertise is needed.
  • HMRC’s representative will present their case, explaining why they believe the claim is invalid.
  • The company (or their legal representative) argues why the R&D claim should be accepted, often relying on technical evidence and expert testimony.
  • Witnesses (e.g., company employees, tax advisors, or R&D experts) may be cross-examined.
• Decision-Making
  • The judge considers the evidence and legal arguments before issuing a written decision.
  • The tribunal may rule in favour of the company (restoring or adjusting the claim) or uphold HMRC’s decision.
• Post-Hearing Options
  • If the company loses, it may appeal to the Upper Tribunal (with permission).
  • If HMRC loses, they may also appeal.
  • If successful, the company may receive a tax refund or adjusted relief based on the tribunal’s ruling.

Having the right team present—internal finance, technical staff, or external advisors—can make a strong impression and help resolve queries efficiently.

Outcomes of a compliance check can range from full approval of the claim to adjustments or, in the worst-case scenario, full denial.

A positive outcome results in the claim being accepted and the company receiving the tax relief or payable credit without changes. If HMRC identifies errors or overstatements, they may adjust the claim accordingly, potentially reducing the benefit the company receives.

In cases where HMRC deems the claim entirely ineligible, they may disallow it altogether, which can have significant financial consequences.

It’s important to take any compliance check seriously, as a failed compliance check can increase the likelihood of future scrutiny, meaning the company’s future claims may be subject to further reviews.

Being well-prepared, responsive, and transparent can make the process smoother and increase the chances of a favourable outcome.

Seeking professional advice at this stage is essential, as navigating tax appeals can be complex and time-consuming.

At Tax Cloud, we’re always here to help. We have expert knowledge in compliance checks and have won several First-Tier Tax Tribunal cases. Working with R&D tax specialists to prepare your claim, such as ourselves, who understand the technical and tax aspects of R&D relief can significantly reduce the likelihood of issues arising.

However, if it’s too late and you’re already in the middle of defending your claim, we offer an enquiry support service; we can advise on the strength of your claim and guide you in the level of detail you’ll need to provide.

Get in touch with our expert team to reduce your stress and increase your chances of keeping hold of this valuable incentive.