Recently, HMRC has upped the ante in its approach to R&D tax credit claims. This is because HMRC is determined to better combat scheme abuse, with the R&D incentive being the subject of frequent intentional system fraud.

If you’ve filed a research and development tax relief claim previously, you may have received your funding with little to no communications from HMRC. But the greater attention to detail, combined with 100 new staff in HMRC’s compliance unit, means many more businesses are now experiencing some form of eligibility or compliance check.

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If you fall into this category, don’t worry - we’re here to help.

Today, we’re explaining the ins and outs of HMRC correspondence, from eligibility letters to compliance checks, to ensure you take the right steps to secure the funding you deserve.

HMRC correspondence: the lowdown 

Correspondence from HMRC can strike fear into the hearts of business owners. This doesn’t have to be the case, though. It’s important to understand the basics of HMRC’s communications to better understand how these processes pertain to your business and your claim:

  • All HMRC letters relating to your R&D claim should be taken seriously
  • Receiving payment doesn’t mean your claim has been approved - simply that it has been processed. HMRC may intend to conduct retrospective checks to ensure your claim is accurate
  • Claim enquiries from HMRC are on a notable rise 
  • There has been a particular focus on the accuracy of claims within the software and construction industries recently

R&D eligibility letters

Commonly referred to as a ‘nudge’ letter, an eligibility letter from HMRC shouldn’t be confused with a compliance check letter.

Receiving an eligibility letter doesn’t necessarily mean that there’s anything wrong with your R&D claim, as it simply serves to motivate companies to proactively check their own claims for errors.

Of course, this doesn’t mean your eligibility letter should simply be disregarded and ignored. Doing so could result in an inaccuracy within your claim, meaning you could be subject to compliance checks further down the line.

‘Nudge letter’: the telltale signs

How can you tell whether the letter you’ve received from HMRC is a ‘nudge’ letter? 

Well, these eligibility letters tend to follow a template. Your eligibility letter likely includes the heading: ‘Research and Development (R&D) tax relief – help confirming you are eligible’.

Why have you received a ‘nudge letter’?

Receiving an eligibility letter doesn’t necessarily mean there’s an inaccuracy in your claim.

On the contrary, the letter is intended to motivate businesses to ensure they’re applying the required scrutiny to their claim. With the National Audit Office pressurising HMRC to reduce the number of errors exposed in compliance checks, the hope is that these letters motivate companies to be more thorough with their own claims. In theory, this means fewer mistakes.

‘Nudge letter’: what to do next 

Technically, you’re not required to do anything when an eligibility letter drops through your letterbox - although that doesn’t mean you should do nothing.

Instead, we recommend following any advice offered within the letter, going over your claim with a fine-tooth comb to spot any potential errors. It’s likely there are a range of resources listed in HMRC’s correspondence that will help you do this properly, so be sure to take advantage of these.

Sure, this will take a little extra effort on your part, and it’s understandable that this may tempt you to put this letter at the bottom of the pile. But any errors left unaddressed now will only raise red flags further down the line, meaning it’s always best to avoid assuming everything is right.

Of course, if you’re having any trouble determining the accuracy of your claim, you can always recruit the assistance of professional advisors.

R&D compliance letter

Separate to a ‘nudge’ letter, HMRC may request further information from you to clarify any queries they may have. While, in most cases, a simple review of your claim documents will be enough for HMRC to process and accept your claim, in some instances, they make look to launch an enquiry.

An HMRC enquiry starts with a compliance check, so, if you receive a compliance check letter, it’s important that you act quickly and proactively.

Compliance checks study your company tax returns, meaning there are a wide range of avenues HMRC could be exploring. If it pertains to your R&D claim, it will say so in your compliance letter.

Compliance letter: the telltale signs

Much like a ‘nudge letter’, compliance letters tend to follow a template. This means they can be easily identified if your letter contains the heading: ‘Check of the Company tax return for the period ended…’.

Within this correspondence will be a range of resources including legislative sources and factsheets. It’s important you take the time to read all of this carefully, as these resources will assist greatly in helping you understand your situation and answering any questions you may have.

Why have you received a compliance letter?

The reasoning behind HMRC compliance checks varies depending on your claim. It’s interesting to note that HMRC opens enquiries into a set proportion of all R&D claims, and, with a shift towards greater scrutiny, this proportion has increased in recent years.

Common causes of an HMRC compliance check include, but are not limited to:

  • Inconsistencies - HMRC believes an aspect of your claim isn’t credible 
  • Tax return queries - if HMRC has a question about your tax return, R&D is often included in an overall enquiry
  • Industry focus - HMRC often pays closer attention to the accuracy of claims within given industries. As previously mentioned, software and construction industries have been subject to this recently
  • Fact finding - if there’s been a change in your claim, HMRC may launch a fact-finding enquiry to confirm your circumstances

Compliance letter: what to do next 

A compliance letter signals the start of an HMRC enquiry, meaning any actions should be taken as a priority.

You typically have 30 days from the stated date to respond to any questions or requests in your compliance letter, so avoid putting it to one side. Instead, take the time to ensure a thorough and proactive response.

While the majority of inaccurate claim cases are innocent mistakes, more severe compliance infringements can result in penalties. So too can missed deadlines.

With this in mind, if you’re ever unsure of what information is required (or whether you’ve provided it correctly), always seek expert assistance.

Get it right the first time

Eligibility and compliance letters shouldn’t be seen as a skull and crossbones for your R&D tax credit claim. Instead, understand that HMRC is often acting under precaution, and, in instances where you are in the wrong, you’re still able to make amends.

Of course, the easiest way to ensure a smooth relationship between your business’s R&D claims and HMRC is to get your claim right the first time. To ensure complete accuracy and maximise the value of your claim, get in touch with Lumo to discover how we can help.

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