Below is a quick bulletin on what’s been happening recently in the wider R&D space!

Success Story: A major win as HMRC accepts our client’s R&D Claim after yearlong Enquiry

We’re celebrating a great result this week a HMRC R&D tax relief enquiry that had been ongoing since September 2024 has finally been successfully closed in our client’s favour.

Our client, an innovative company, had their R&D claim challenged after HMRC initially issued a closure notice, believing their activities did not qualify as R&D. After months of detailed correspondence, our innovation tax team successfully demonstrated that the company’s projects involved genuine scientific and technological uncertainty.

HMRC accepted the argument and reversed their decision, recognising that the company was indeed undertaking qualifying R&D activities. This outcome highlights two key points:

• The R&D landscape has changed significantly, especially following increased scrutiny.
• Strong technical evidence and experienced representation remain critical in defending legitimate claims.

The Changing R&D Tax Relief Landscape

R&D tax relief remains one of the most valuable incentives for UK innovation, but HMRC’s approach has become far more rigorous. Claims are now scrutinised more deeply than ever, and businesses must be prepared to justify both the technical and financial aspects of their claim. Specialist advisers are currently discussing several major themes shaping the R&D tax environment in 2025.

What This Means for UK Businesses

The R&D tax relief regime remains valuable but complex. To make the most of it:

• Keep detailed records of your R&D activity and technical challenges.
• Submit claims promptly and track each accounting period separately.
• Work with a specialist adviser who understands HMRC’s latest approach.
• Be proactive in defending legitimate claims, as our client’s success proves, persistence pays off.

What are specialist R & D advisers currently talking about?

1. HMRC’s Evolving Approach to R&D Enquiries 

Recent developments and shared experiences have highlighted several practical and interpretive points under the current HMRC enquiry environment.

For example, a recent case involving a horticulture company demonstrated that R&D claims previously denied by HMRC can sometimes be reinstated through constructive engagement and alternative dispute resolution (ADR). The case progressed through written defences, ADR registration, and finally an informal discussion with HMRC, after which both claims were reinstated in full.

This outcome suggests that HMRC may be adopting a more pragmatic approach where claimants can demonstrate credibility, clarity of competent professionals (CPs) involved, and a well-defined technological advancement relative to the baseline. In such interactions, officers often focus on the claimant’s credibility and understanding of the project, rather than exhaustive technical depth, aligning with how cases might later be assessed in a tribunal setting. This reinforces the importance of clear, consistent communication and credible project documentation throughout the enquiry process.

2. Overseas and Subcontractor Restrictions Under the Merged Scheme

The application of the new overseas and subcontractor restrictions continues to be a critical area under the merged scheme. For accounting periods beginning on or after 1 April 2024, costs related to overseas subcontractors and externally provided workers are excluded unless the activity meets strict statutory exceptions. For companies with extended accounting periods straddling this date, only those overseas costs incurred up to the final day of the corporation tax period within the old scheme may be included. Thereafter, such costs are disallowed under the merged regime. This makes accurate accrual and cost recognition at the cut-off date essential to safeguard eligible expenditure.

3. HMRC Challenges on Consumable Cost Classification 

In certain circumstances, HMRC may refuse to allow consumable costs on the basis that they appear in the “Cost of Sales” section of a company’s accounts, even though the legislated position treats qualifying consumables (e.g materials, power, fuel, water) as eligible if consumed in R&D activity. The critical factor is substance over form, what matters is whether the costs were used (consumed or transformed) in qualifying R&D, not necessarily how the accountant classified them in financial statements. In such cases, evidence that materials were consumed internally (e.g prototypes, scrapped parts) rather than sold is key. HMRC’s internal manual confirms that consumable items must be used in R&D and not be subsequently sold.

4. Complaints, conduct concerns and escalation (including ADR)

If you consider an HMRC officer’s conduct unreasonable, their requests disproportionate, or experience significant delays in response, the correct course of action is to raise a formal complaint through HMRC’s complaints procedure. This process addresses concerns about how HMRC has handled your case rather than the outcome of a tax decision. Complaints can be submitted directly via HMRC’s website, and HMRC aims to acknowledge within 15 working days and provide a target date for full response. In our own experience, this has led to HMRC confirming a tentative response timeline and, where appropriate, taking corrective action or upholding the complaint against the officer in question.

If your concern relates to disagreement with HMRC’s R&D decision itself rather than conduct or delay, the matter moves into the appeals and dispute process. The next step in such cases is to request an independent internal review of the decision by a separate HMRC officer. If the issue remains unresolved, Alternative Dispute Resolution (ADR)  (a mediation-based process) can be used at various points in the dispute, most commonly before escalating to a First-tier Tax Tribunal. ADR is voluntary but often effective in reaching a fair and timely resolution without formal litigation.

5. Case Example: Escalation and Resolution of HMRC Delay During Appeal Process

We’ve also had a recent experience that’s worth sharing as it highlights the options available to us when HMRC delays their response. In one of our appeal cases, where HMRC had initially disagreed with our position, we experienced a prolonged period without any update. We then sent an email to HMRC advising that if no response was received within seven days, we would proceed to raise a formal complaint through HMRC’s official channel.

Before the deadline expired, HMRC responded, apologised for the delay, and took a more constructive approach than usual arranging a discussion call between the CP and Tax Advisor to progress the matter. This outcome reinforces that we have several formal routes available to address delays or disputes, and it also reflects the proactive steps we take to ensure every claim is handled efficiently and fairly.

Interesting things happening in R & D, in the real world! 

Here’s what’s been making headlines and shaping the future of research and development globally and in the UK.

• HMRC Launches New R&D Tax Relief Eligibility Checker: HMRC introduced an online tool to help businesses determine if their projects qualify for R&D tax relief. The tool guides users through key eligibility tests and provides feedback based on the information provided, aiming to improve claim accuracy and reduce errors.
• UK-India Research & Innovation Partnerships Launched: During the UK Prime Minister’s visit to India, UK Research & Innovation (UKRI) announced new joint initiatives, including the UK-India Connectivity & Innovation Centre (CIC), to strengthen research collaboration between the two nations. 
• DSIT Announces £50 Million Life-Sciences Fund: The Department for Science, Innovation & Technology (DSIT) unveiled a £50 million fund to support the scaling and manufacturing capacity of life sciences companies in the UK. This initiative aims to bolster the UK’s position in vaccine and biotech R&D, following the opening of Moderna’s new Innovation & Technology Centre in Oxfordshire.

Need Help with an R&D Enquiry or Claim?

If you’re facing an HMRC R&D enquiry, or you’re unsure if your projects qualify, our specialist team can help. Email or contact us to discuss your situation confidentially with a free fact find meeting.

https://kudosaccountants.co.uk/contact-us/

We work with ambitious business owners who want to innovate and grow, partnering with you to understand your challenges, collaborate on your claim, and help your business thrive.