Approximately 1 in 6 claims (17%) will be subject to scrutiny under the R&D tax relief scheme, with risks increasing for claims that are flagged by HMRC’s algorithm. It is essential that companies seeking to claim under the R&D tax scheme are aware of the potential risks that may arise from submitting a claim.
This article provides a comprehensive overview of specific risk factors and actionable steps that can be taken by eligible companies to mitigate these factors, applicable for claims both submitted under the previous SME and RDEC scheme and those under the new Merged Scheme and ERIS.
Enquiries and penalties
HMRC has substantially increased its compliance activity following the identification of significant levels of error and fraud within the R&D tax relief scheme. To clarify, compliance checks, also known as enquiries, consist of formal investigations conducted by HMRC to verify the legitimacy of claims submitted by companies under the R&D Tax Relief scheme. This has resulted in a drastic improvement in error and fraud rates, from 16.7% as of 2020-2021 to 5.9% in 2024-2025.
There are two main ways in which a claim may be selected for an enquiry: a random selection process and a risk-based assessment. The former is known as the Mandatory Random Enquiry Programme (MREP) and consists of a randomised programme implemented to ensure an accurate and unbiased representation of all submitted claims during the selection procedure. Meanwhile, the latter consists of risk-based assessments, which involve the use of an algorithm which flags submissions with clear risk indicators. These indicators include a sharp increase in claim value from previous years, vague project descriptions, claiming for activities that do not meet the R&D tax relief criteria, and inconsistent costs.
If HMRC identifies an inconsistency or error in a claim, a penalty will be calculated as a percentage of the potential lost revenue (PLR), which refers to the additional amount of unpaid tax resulting from an error, inaccuracy, or failure to fulfil notification obligations. It is important to note that HMRC will not impose a penalty for an error if the company under scrutiny can demonstrate that it exercised reasonable care when preparing the claim. This can be demonstrated by obtaining professional advice from an R&D specialist during the preparation of the claim, maintaining careful bookkeeping, and promptly cooperating with HMRC in the event of an error.
However, if a company is unable to demonstrate reasonable care, it must pay a penalty which is calculated as a percentage depending on the magnitude of the error encountered. For errors occurring from failure to take reasonable care, a statutory penalty charge ranging from 0% to 30% is applied to the PLR. This depends on whether the error was voluntarily disclosed, as well as whether this disclosure was transparent and at what level of cooperation.
Where an error is committed deliberately, penalty percentages will range from 20% to 70%. This includes overstating claim values, including non-qualifying activities, and misrepresenting technical projects. Once again, if a company collaborates, it may incur a lower penalty compared to the full 70%.
Finally, deliberate and concealed errors are the most severe type of penalties, which could range from 30% to 100% of the PLR. To fall under this bracket, a claim must be considered fraudulent, with the claimant company demonstrating deliberate attempts to submit false information and conceal these errors.
In addition to a penalty, companies may also be required to repay the overclaimed amount of the previously claimed credits. This amount is accompanied by an interest rate of 7.75% as of January 9, 2026, on the outstanding amounts from the due date of the Corporation Tax return until repayment.
It is worth noting that tax guidance is ever evolving, with the information utilised in this article reflecting current figures that might not be representative of the penalty system at a later date.
Discovery assessments
If significant errors and fraud are identified in an R&D claim, HMRC may be inclined to issue a discovery assessment into previous accounting periods. They are allowed to investigate records dating back up to 20 years, depending on the severity of the error. This can be avoided by ensuring that all technical data, costs, and advancements represented are accurate, up-to-date, and comply with the definition of R&D under the scheme guidelines.
Delays in cash flow
Your R&D tax credit payments may be delayed due to compliance checks, which can continue to cause further delays if responses to HMRC are not quick or appear to be lacking in information and details. HMRC has increased the processing time from 28 days to 40 days to accommodate these checks, further emphasising the importance of minimising the risk of enquiry. For more information on how to reduce the risk of an enquiry, check out our article on How to Avoid an R&D Enquiry.
Do not panic, instead prepare
While the previous risk factors might sound intimidating to companies seeking to claim, they can largely be mitigated through proper conduct and a thorough understanding of the R&D tax relief scheme. Below are a few key actions one can take during the preparation of a claim to minimise risk effectively.
Familiarisation with the scheme
An understanding of the scheme’s guidelines, such as what constitutes qualifying and non-qualifying R&D activity and costs, will ensure that a claim meets the definition of R&D under the tax relief scheme. This will not only increase the robustness of a claim, but it can also lead to an increase in the R&D tax credit received, as companies might not be aware of eligible activities they have partaken in during the relevant financial period.
The CIRD manual is a great resource for those seeking to familiarise themselves with the scheme. Available on the government’s website, the manual provides an in-depth explanation of the scheme, including what constitutes as R&D activities and costs.
If working with a specialist in the field, request a comprehensive explanation of what constitutes a strong claim. By understanding the definition of R&D under the guidelines, you will also be better prepared to relay relevant details of an eligible project.
Consistent records
HMRC’s algorithm identifies financial inconsistencies as a risk factor, thereby increasing the likelihood that a claim will be highlighted during risk-based assessments. Furthermore, the inability to keep up-to-date records might lower the amount a company is legible for, as they will not be able to claim for costs without evidence.
It is best practice to avoid conducting estimates, overstating costs, and including ineligible projects, as these practices can hinder the success of your claim and increase the likelihood of an enquiry.
Comprehensive technical narrative
A comprehensive technical report is essential to demonstrate to HMRC how a claim aligns with the DSIT Guidelines. For a strong narrative, avoid using vague descriptions or including information that is irrelevant to the technical advancements being sought. Instead, focus on the elements within a project that are new or represent an appreciable improvement in the field of science or technology. Do include an analysis on what was previously available in the public domain and explain how this information could not be utilised to resolve the uncertainties encountered within the project.
Seeking out a qualified advisor
Proof that a company has sought out professional advice shows reasonable care was taken during the preparation of the claim, further strengthening its validity. However, companies should conduct research before choosing a specialist, as the wrong advisor might choose to inflate a claim or fail to provide adequate enquiry support. When picking an advisor, opt for a trusted specialist with an experienced background in R&D tax claims, and preferably one that includes enquiry support in their services.
R&D Voluntary Disclosure Service
Launched in December 2024 by HMRC, this online facility allows companies to voluntarily correct historic overclaims or inaccuracies found in past claims. This service can only be used by companies who have overclaimed due to lack of reasonable care, as opposed to deliberate actions to mislead. Promptly disclosing this information can mitigate potential penalties, which as mentioned previously, are typically lower for unprompted disclosures.
R&D claims have experienced a drop of 26% as of the 2023 to 2024 tax year, likely motivated by the increase in compliance checks and adjustments to the overall scheme. However, companies that qualify for R&D tax relief should not be deterred from participating in the scheme, as risks can be largely mitigated by working with a R&D tax specialist and ensuring that a claim complies with the scheme’s guidelines.
