Firstly, they’re the same thing. Compliance check is more modern terminology, but HMRC enquiry can also be used. (Note: HMRC inquiry is a US English spelling and occasionally use in British English dependent on formality. Here, we'll use compliance check, or enquiry.)

It’s exactly what it sounds like – HMRC doing a double check on the compliance surrounding your R&D tax relief claim.

In practice, this means requesting more information about a claim in order to determine whether it’s genuine, and with the rules of the system.

When your claim is filed with HMRC, a tax inspector will look at how much you’re claiming, against what, through which scheme, and - to some extent - compared to sector benchmarks.

Claims include financial data, technical information about the R&D, and other things – like whether you’ve had a grant.

If any of these look unusual, if things don’t match up, or if more details are needed, an enquiry – or compliance check – can be raised by the inspector.

This isn’t automatically negative; HMRC isn’t looking to penalise genuine claimants, but to monitor the system to ensure genuine companies undertaking qualifying activities receive the rewards they deserve; and that those who aren’t genuine, aren’t.

Here are a few reasons a claim may be flagged:

1. Your claim value has significantly increased

2. The R&D you’re undertaking is new for/to your sector

Occasionally HMRC will look at your claim as a benchmark for future, similar claims in the sector if the R&D isn’t something they’ve come across before.

3. Lack of evidence

4. Financial inconsistencies

The above two are really the same thing: does what you’re saying make sense, can you evidence it, and have you calculated things correctly.

Claims including subcontractors and EPWs are often flagged for compliance checks if the amount claimed against them is high.

Similarly, claiming against projects that have also had grant funding increases your chances of an enquiry being raised.

5. Random spot check

You’ll receive a letter saying that HMRC are conducing a compliance check of your R&D tax relief claim; this is the start of an enquiry.

It’ll probably be headed ‘Check of the Company tax return for the period ended…’, and will include a list if questions that you need to answer.

You should act on this immediately. You typically have 30 days from the date on the letter to respond but it could take some time to gather the answer to the questions, and, if you’ve claimed through an advisor, you need to take their turnaround times into account too.

The first step after this is to return your answers, along with supporting evidence if needed; these will be reviewed, and either more questions will come, or your answers will suffice to close the enquiry. It's also useful to make contact with the inspector on your case to discuss timelines and build a relationship.

If further questioning takes place, this can be done via a meeting (face to face or online, restrictions dependent), where a tax inspector and occasionally a technical colleague will interrogate your claim and ask you to respond.

If you don't agree with the outcome you can appeal the decision and ask for another chance to state your case, or you can accept the conclusion.

The longer you take to answer questions, the less helpful your responses are, and what decision you decide to accept will all impact how long the process will take.

The outcome of a compliance check depends on how well you respond to the questions raised by HMRC. Both parties are looking for a resolution, however, there is no quick way to close a check; submit your responses as fully as you can and go from there.

A minimum turnaround time from enquiry to close is around three months but they can take years to close.

It can take a considerable amount of work from both parties (advisor and claimant) to answer the questions thoroughly, so it’s important to get your claim compliant before submitting it.

The longer you take to answer questions, the less helpful your responses are, workload and availability of the tax inspector, and what you decide to accept as a result will all impact how long the process will take.

No. These letters – sometimes called ‘nudge’ letters – are designed to remind claimants that they should ensure their eligibility before claiming tax reliefs.

This type of letter will contain a heading such as ‘Research and Development (R&D) tax relief – help confirming you are eligible’.

Following the guidelines on the letter is all you or your advisor need to do – this involves reviewing your claim again to make sure you’re satisfied that everything stated within it is accurate and can be evidenced, correcting it and resubmitting if not.

1. Delays to your payout

Your payment will definitely be delayed if it’s flagged for a compliance check. Pay out times in the best circumstances have been increase to 40 days recently, so anyone under enquiry will face an even longer turnaround than that.

2. Successful defence

Many advisors have excellent defence success rates. That’s one of the reasons our clients work with us. The ultimate goal of any defence against a genuine claim is to maintain the claim value and win the maximum relief for the client.

Even if you’re not a client but you need support with a compliance check, we’re happy to help. Get in touch.

3. Reduced claim size

If activity is found to be ineligible or costs can’t be evidenced, those parts of the claim can be rejected, meaning you’ll receive less than you initially applied for.

4. More checks against historical claims

HMRC has the right to review filed claims dating back six years, and even further if deliberate fraud is suspected.

If those checks fail, historic claim values can be reduced – meaning you’ll have to pay back funds newly determined as incorrectly received, regardless of whether you’ve already spent them.

5. Reputational damage

Unfortunately, once you’ve been flagged for one compliance check you may now be on HMRC's radar, and future checks could be more likely.

6. Investigation/audit

On occasion, checks/enquiries do escalate to full-scale investigation or audit. This is serious. HMRC will check financial activity against your business thoroughly, looking to uncover any and all errors to determine full compliance in all areas – not just in your R&D tax claims.

7. Penalties

HMRC does have the power to issue penalties (financial or prison sentences) to fraudulent claimants, and we’re seeing more stories of this happening. Fortunately, however, this is reserved for deliberate criminal activity and uncooperative plaintiffs.

If errors are found to have been deliberately made, or information is seen to have been intentionally hidden, penalties of up to 100% of the tax lost by the Exchequer, plus interest, can be issued.

You!

An advisor will provide support based on professional experience and knowledge, but you are ultimately responsible for giving them honest and accurate information, and checking that their interpretation of your R&D and financials is right.

It's incredibly important you work with a reputable advisor that you can trust, and one that knows your sector. For help understanding what 'good advice' looks like, check out our free guide here.

You can’t. Even if your claim is 100% accurate, evidenced, explained and triple checked, spot checks still happen!

What you can do, however, is ensure what you are filing is as solid as it can possibly be.

This is one of the key reasons companies use an R&D tax relief adviser like MPA. We have in-house tax advisors, accountants, and technical experts who will work on your claim together to ensure as best as we possibly can that what we file on your behalf is compliant and clear.

That means checking financials, interrogating costs breakdowns, applying the right tax law to your unique situation, filing through the right scheme, uncovering all activity and excluding that which won’t stand up to scrutiny, and, of course, defending you should an enquiry be raised as part of your agreed fee.

You have final sign off on your claim and it's you who is liable should issues be found, so building a good relationship with a reputable advisor is crucial.

Many R&D tax advisers including MPA offer HMRC enquiry defence as an additional service to new clients, as well as including it as standard for existing.

To speak to MPA about your compliance check leave your details here and we’ll see if we can help.

If seeking external help isn’t right for you, we encourage you to use the information included in your initial letter which will provide extensive guidance, and before you submit, check out our content section for all the help you need on filing a robust R&D tax relief claim.