R&D tax
Why HMRC rejects R&D tax claims, and how to defend an enquiry
The reasons HMRC reduces or refuses UK R&D tax credit claims, what a compliance check involves, and how to write a claim that survives close reading.
Compliance activity has changed the game
HMRC has materially increased the resource it puts into checking R&D claims, and a compliance check is no longer a rare event reserved for outliers. Ordinary, honest claims are being opened and examined, which means the standard of evidence a claim needs has risen.
The practical consequence is simple. A claim should be written as though an inspector will read it line by line, because there is a real chance one will.
Reason one: no identifiable advance in the field
The most common reduction is that the work described is commercial product development rather than an advance in science or technology. Building something new to your company is not the test. The test is whether the knowledge or capability was not readily deducible by a competent professional in the field.
Claims fail here when the narrative describes features and customer benefits. They succeed when they describe the state of the art, the specific limitation in it, and the technological advance sought against that baseline.
Reason two: uncertainty that is not really uncertain
HMRC looks for scientific or technological uncertainty: a point where a competent professional genuinely could not say whether or how something could be achieved. Time pressure, budget constraints and unfamiliarity with a well documented technology are not uncertainties.
Strong claims name the uncertainty precisely, describe the alternatives considered and rejected, and are honest about what failed. Failed iterations are evidence, not embarrassment.
Reason three: cost and apportionment problems
Costs are reduced where staff time is apportioned with round percentages and no supporting method, where non-qualifying activity such as routine testing or commercial work is swept in, where subcontractor and externally provided worker rules are misapplied, or where the territorial restrictions on overseas expenditure are ignored.
Keep the method. An apportionment based on timesheets, sprint records or project codes can be explained in a sentence. One based on recollection cannot.
Reason four: procedural failures
Claims are also lost for reasons that have nothing to do with the science: a missing additional information form, a required advance notification not given in time, an amendment made outside the two year window, or no named competent professional.
These are entirely avoidable and entirely fatal. Check them before anything else.
What an enquiry involves
A compliance check usually opens with a letter asking for the technical justification for named projects, the basis of the cost apportionment, and evidence supporting both. Deadlines for response are short, and a weak first reply sets the tone for everything that follows.
The best defence is the original report. If it already sets out baseline, uncertainty, advance and competent professional with evidence attached, the response is largely a matter of pointing at what was filed. If it does not, the company is reconstructing the case under time pressure.
Writing a claim that survives
Interview the engineers and scientists who did the work rather than the finance team who paid for it. Define the state of the art with references. State the uncertainty and the advance in measurable terms. Show the apportionment method. Name the competent professional and say why they qualify.
That is more work than filling in a template, and it is the difference between a claim that is processed and a claim that is examined and reduced. If you already hold a report prepared by someone else, having it read against these points before you file is cheap insurance.
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