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What do HMRC nudge letters mean for your R&D tax relief claims?

28th Nov 2023
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HMRC Nudge Letters are not the start of a compliance check, but they do signal that it is a good time to check your claims!

Business Person receiving a letter

You might be familiar with HMRC nudge letters – maybe your client has received one, especially if they work in a sector less traditionally associated with R&D. Over the past 18 months, HMRC has intensified its scrutiny of Research and Development (R&D) tax relief claims, broadly issuing more compliance checks and supplementary questions than ever before. As part of this overarching change in strategy, they’ve also incorporated a tactic known as the "nudge." This involves a written letter from HMRC to your client, but it does not signal the start of a compliance check.

What it does indicate is that HMRC is looking at your client as a potential risk. That means it’s probably a good time for you to review and verify the accuracy of your client’s claim. This is your opportunity to ensure that all aspects are in order before they run into trouble further down the line. 

One of the most common formats of these letters presents the business with seven specific questions designed to guide their evaluation:

  1. Have you thoroughly studied and comprehended the HMRC guidance on R&D?
  2. Have you considered the conditions required for a valid claim? Are you confident that your project aligns with the advancement of science and technology?
  3. Do you possess a clear understanding of the components of your claim?
  4. Who has contributed to the supporting R&D report, and are they duly qualified?
  5. Have you critically reviewed the R&D report, and do you endorse its contents?
  6. If you've engaged a third party in making the claim, have they adequately addressed your inquiries?
  7. Does the magnitude of your claim raise any scepticism?

It is crucial to note that these letters emphasise the responsibility of a company director in submitting accurate claims for the appropriate amount of tax relief. This is made more obvious by the fact that your clients receive the letter, rather than you, but it is worth making sure that everyone is aware of each party’s specific responsibilities. The correspondence warns that inaccurate claims may result in the company being required to reimburse the entire claimed amount:

“As a company Director, it’s important to submit accurate claims for the correct amount of tax relief.  If we check a claim and find it incorrect, your company might be asked to pay back the full amount.”

Similar letters tailored to specific industries, such as care homes or construction, inquire about familiarity with the BEIS guidelines and conditions. If a claim is submitted in an area where HMRC deems qualifying activity unlikely, your clients face a much higher chance of receiving a nudge letter. 

So, what should you do when your client receives a nudge letter? 

First and foremost, remain calm! This isn’t the start of an enquiry – it’s just HMRC making sure that your client is comfortable with the accuracy of any claims they submit. However, a meticulous review of any claims in progress should be top of your to-do list. Scrutinise R&D expenditure, validate dates, and ensure mathematical accuracy. Even more importantly, double check that the R&D activity genuinely qualifies. Does the narrative establish a technology baseline, and present a clear advancement of science and technology in your client’s industry? Are the uncertainties technical in nature and clearly described?

Seeking a second opinion from a colleague or reaching out to your professional network is good idea too. It is much better to correct mistakes at this point than to contend with a comprehensive compliance check and potential penalties for perceived carelessness.

HMRC’s campaign to improve R&D compliance

This tactic and the messaging contained within the letters aligns with HMRC's perspective that the scheme contains unacceptable levels of fraud and error. Jim Harra, the Chief Executive of HMRC, stated in an October 18th session with the House of Commons Treasury Committee that over £1 billion of relief was due to error and fraud in 2020/2021. Harra also stated that despite approximately 90% of R&D claims having tax agent involvement, half of them contained an element of non-compliance. 

While these “nudge letters” represent a more sympathetic measure in HMRC’s new approach to R&D tax relief, they have been much stricter when it comes to compliance checks. Any measures that you can take to avoid getting to that point are well worth taking. Ideally, your claims would be bulletproof from the start. But between high workloads, changing guidance, and uninformed clients, we recognise that is not always easily accomplished.

If you’re looking for a tool to help you check your claims, our Red Flag Checklist helps identify the most common mistakes that catch HMRC’s attention