R&D Tax credit investigations continue to rise. Our specialist defence team is here to help. Call for a free consultation today.
Introduction to R&D Tax investigations
HMRC is carrying out significantly more R&D tax credit investigations than in previous years, particularly following changes to the regime in 2023 and the introduction of the merged scheme in April 2024. Many businesses are being contacted even where they believed their claims were accurate.
If you have received an enquiry letter, repayment demand, or penalty warning, you are not alone. The important point is that most R&D enquiries can be resolved with the right advice — and early action always helps. Our R&D tax credit defence team is headed up by Andy Lynch, previously a senior investigator at HMRC for 18 years, and with invaluable expertise as to how HMRC approaches these claims – and how to defend them.
At a glance
HMRC is increasing R&D compliance activity in 2025. More businesses are being asked to justify their claims, explain their technical reports and provide supporting records. Many enquiries arise from simple errors rather than deliberate behaviour, but HMRC’s process can still feel intrusive and time-consuming.
In this guide you will learn:
- Why HMRC has increased R&D investigations in 2025.
- What triggers an enquiry.
- What happens during the process.
- Common reasons claims are rejected.
- Practical steps to protect your position.
If you need support at any stage, our tax dispute team has over 25 years’ experience dealing with HMRC investigations and can help you manage the process calmly and safely.
Why is HMRC increasing R&D tax credit investigations in 2025?
HMRC’s compliance focus has shifted significantly following the release of its HMRC 2023–24 annual report and its updated approach to R&D tax reliefs. HMRC now estimates that error and fraud rates across R&D claims remain high, particularly in certain sectors and in claims submitted by high-volume agents. As a result, the department has increased staffing in its specialised R&D compliance units and is issuing more investigation letters than in previous years.
Several developments explain this change.
1. Higher error and fraud estimates
HMRC’s recent reports show substantial levels of inaccuracy in R&D claims across both the SME scheme and the merged scheme introduced in April 2024. The merged scheme includes new rules on externally provided workers and subcontracted R&D, and relief is subject to a cap linked to PAYE and NICs, which has encouraged HMRC to apply more robust checks even where errors appear unintentional.
2. Greater scrutiny of advisers
Some commercial R&D agents have submitted large numbers of claims with limited technical justification. HMRC now categorises certain firms and their clients as “high-risk” and automatically reviews their submissions.
3. More targeted compliance models
HMRC has adopted a risk-based approach that uses sector data, expenditure patterns and claim frequency to flag businesses. Even genuine claimants can be selected for review if their profile matches these indicators.
4. Pressure on HMRC to recover losses
Parliamentary committees have urged HMRC to reduce non-compliance in the scheme. This has resulted in increased use of enquiry powers, penalties and repayment demands.
5. New combined R&D scheme
The move towards a single scheme has prompted HMRC to tighten processes and ensure businesses apply the rules correctly.
FWJ Comment:
HMRC’s priority is clearly aimed at reducing errors and protect public funds. This means more businesses will face enquiries — even when they have acted in good faith. Whether it succeeds remains to be seem – HM Revenue & Customs is generally struggling to keep up with current obligations. So whether it will make a difference is yet to be seen.
What triggers an HMRC investigation into an R&D tax claim?
HMRC enquiries can start for many different reasons. Some are routine checks. Others arise because HMRC believes the claim may be inaccurate or incomplete.
From our review of the data, the most common triggers include:
1. Claims that do not match industry benchmarks
HMRC compares claims against those made by similar companies. A claim that appears unusually large or complex may lead to enquiry.
2. Weak or generic technical reports
If the report lacks a clear explanation of the scientific or technological uncertainty — or appears to be template-based — HMRC may request further information.
3. Inconsistent financial information
Differences between payroll, subcontractor costs, consumables, and the figures included in the R&D computation can lead to questions.
4. High-risk sectors
Sectors such as software development, construction, engineering, and fintech are currently receiving closer attention.
5. Claims prepared by high-risk agents
Some advisers have been identified by HMRC as submitting large volumes of inaccurate claims. If your agent has been categorised this way, HMRC may examine your claim as part of a wider project. We can help advise you in these circumstances and also consider a professional negligence claim the advisers if they have got it wrong.
6. Past inaccuracies
If a previous claim has been amended or corrected, HMRC may look closely at subsequent submissions.
7. Random selection
A proportion of enquiries remain random. HMRC uses these to maintain oversight of the scheme.
FWJ Takeaway:
An enquiry does not mean HMRC believes you acted deliberately. Many are triggered by patterns, benchmarks or adviser history. Prompt, clear responses help protect your position. If you are a CFO of an affected SME, read our free R&D tax credits investigations: guide for CFOs.
How does HMRC run an R&D enquiry and what should businesses expect?
R&D enquiries follow a structured process under HMRC’s general compliance powers, including its power to enquire into tax returns under section 9A of the Taxes Management Act 1970 and its power to request information and documents under Schedule 36 to the Finance Act 2008. Although each case is different, most follow the same pattern. Understanding this process helps you plan and respond with confidence.
The opening letter
HMRC will write to you setting out the areas they wish to examine. This may include:
- technical justification
- qualifying activities
- staffing and subcontractor costs
- evidence of uncertainty
- supporting financial records
The letter will normally give 30 days to respond.
Requests for documents
HMRC may ask for:
- project descriptions
- technical reports
- payroll reports
- subcontractor agreements
- timesheets or staff allocations
- evidence of prototypes or testing
Providing clear, contemporaneous evidence is important.
Questions for directors or technical staff
HMRC compliance officers may ask for further explanation of the work undertaken. They may also request online or telephone meetings to discuss the claim.
Specialist review
More complex cases may be referred to HMRC’s specialist R&D units. These teams include technical experts who evaluate whether the work meets the definition of R&D for tax purposes.
HMRC’s decision
After reviewing the information, HMRC may:
- accept the claim in full
- amend part of the claim
- disallow the claim entirely
- issue penalties if they consider the inaccuracy careless or deliberate
- request repayment of R&D tax credit already received
Your rights if you disagree
You can challenge HMRC’s decision, supply further evidence, or appeal to the First-tier Tribunal (Tax Chamber). You also have the right to professional representation throughout the process.
FWJ Takeaway:
The enquiry process can feel detailed and formal, but it is manageable. The key is to respond clearly, meet deadlines, and address HMRC’s questions directly.
What are the main issues that lead HMRC to reject or challenge an R&D claim?
Our review of recent cases and industry commentary highlight common issues that cause claims to be reduced or disallowed. Understanding these risks helps businesses avoid similar problems.
1. Weak explanation of the technological uncertainty
HMRC places significant weight on this part of the report. A description that is too general or does not clearly explain the scientific challenge will often be questioned.
2. Overstated staffing or subcontractor costs
Incorrect categorisation of staff time or subcontractor roles is a frequent source of error.
3. Claims for routine or commercial work
HMRC may reject claims where the activity appears to be routine development, testing or implementation rather than genuine R&D.
4. Insufficient evidence
If a business cannot produce documents supporting its calculations or project work, HMRC may disallow the claim.
5. Claims prepared by high-risk advisers
HMRC is scrutinising claims submitted by advisers who have been linked to high-volume, low-quality submissions.
6. Misunderstanding the merged scheme rules
The new rules introduced in 2024 require careful interpretation, particularly around externally provided workers, subcontracted R&D and the cap that links relief to PAYE and NICs. Errors in applying these merged scheme rules can lead to enquiries and adjustments.
7. Careless or deliberate inaccuracies
Where HMRC believes errors arise from carelessness or deliberate behaviour, penalties may follow under Schedule 24 to the Finance Act 2007. If you can show that you took reasonable care, no penalty should be charged, and even where a penalty applies it can often be reduced if you cooperate and make a full disclosure.
FWJ Takeaway:
Most issues stem from unclear documentation, calculation errors or misunderstanding the rules. These can often be addressed with careful explanation and supporting evidence. Our team has 25 years’ experience of doing this work – we can help you too.
How can a business respond to an R&D investigation and reduce the risks?
A calm, structured approach will help you protect your position and resolve the enquiry efficiently. Early professional advice is often beneficial, particularly where HMRC has raised technical or behavioural concerns. Responding promptly, providing clear, well-organised evidence and addressing HMRC’s questions directly.
But we would strongly recommend taking advice before doing anything. A well written response with the benefit of legal advice can save huge amounts of time, effort and money further down the line.
How we can help
We have over 25 years’ experience dealing with HMRC on behalf of businesses and directors. Our work includes supporting clients through R&D tax credit investigations, tax repayment demands, COP8 (Code of Practice 8 and Code of Practice COP9 investigations, and disputes decided before the First-tier Tribunal.
If you have received an R&D enquiry letter or are concerned about a potential investigation, we can help you understand the process, gather the right evidence and respond safely.
Contact our specialist R&D Tax Credit defence team today for clear, practical advice. Free initial consultation always offered.
