The UK’s R&D tax relief scheme plays a pivotal role in supporting businesses with innovation and growth. However, as HMRC tightens its grip with stringent rules and regulations, the process has become trickier to navigate.

Whilst these measures are designed to prevent fraudulent or inaccurate claims, they introduce a hidden risk for investors who may not consider the potential impact to their investment portfolio, should companies incorrectly submit a claim. Within the past year alone, enquiry rates have jumped from 1 per cent to over 20 per cent, with additional risk coming from HMRC’s Mandatory Random Enquiry Programme (MREP), which randomly selects claims for investigation.

The message to investor groups like VCs, PEs, incubators and accelerators is simple: HMRC will aggressively recover funds from businesses that incorrectly submit a claim – how will this affect you?

The challenge for businesses

Fast-growing businesses rely on R&D tax relief as a source of non-dilutive funding. However, the R&D claim process is complex and is rarely a one-off exercise for companies. It quickly puts a strain on internal resources. Preparing and defending claims often requires significant input from multiple teams, including engineers, software developers, and scientists. For all of these individuals, R&D claims are not a typical part of their job description.

This demand creates a significant opportunity cost. Rather than focusing on genuine innovation, these teams must instead dedicate unnecessary time to lengthy claims processes. The cost to the business comes not only from time lost to the R&D relief scheme preparation, but from context switching across teams. It takes significantly more effort to jump from task to task, especially when one activity sits well outside your normal wheelhouse. This will only be exacerbated as HMRC increases its scrutiny and as the scheme evolves.

The risk to investors

HMRC typically processes claims within a 40-day period, however, it often conducts enquiries many months later. It’s more than likely that businesses will have already reinvested the funds by the time they’re informed of an enquiry. In the worst-case scenario, HMRC enquiries can lead to a claim retraction. For companies that find themselves without a sufficient cash reserve and are therefore unable to repay the claim, they face insolvency.

This risks leaving investors out-of-pocket. 

It’s important for investors, therefore, that their portfolio companies follow HMRC’s digital-first approach to ensure they claim accurately, honestly and compliantly first time around, to help future-proof their investments and avoid repayments that could put the future of their valued portfolio at risk.

How to safeguard portfolios

The solution lies in ensuring investor portfolio companies take a more considered approach for R&D claims. Encouraging businesses to adopt HMRC’s digital-first approach and implement robust claim processes can help reduce risks to investments.

Submitting claims as close as possible to the company’s financial year-end means that all activities are fresh in the mind, leading to a more accurate, secure and defensible claim. Additionally, businesses should consider reserving a portion of their tax credit until the enquiry window has passed, to mitigate potential repayment risks.

Technology also helps play a crucial role. Companies that leverage tools that capture and analyse data from across R&D activities in real-time are far better positioned to submit accurate claims and reduce the risk should HMRC come knocking. Working alongside experienced and credible providers can also provide an extra layer of security, to help ensure claims are optimised while remaining fully compliant with HMRC’s strict rules.

A unique opportunity to maximise investments

The R&D relief scheme can provide businesses and their investors with a clear financial advantage. From an investor’s perspective, for every £1 invested, portfolio companies will gain £1.20 through R&D tax relief, allowing them to recycle cash and fuel further innovation.

With the risk of insolvency casting a shadow over their portfolios, investors should encourage companies to take proactive steps to ensure compliance with HMRC’s claim process, leveraging technology where necessary to adopt a digital-first approach. By doing so, they can protect their investments while helping companies unlock the significant value that R&D tax relief provides, and create robust growth strategies based on a more accurate picture of their finances.

Hari Sandhu is the founder of EmpowerRD.

Read more

R&D tax relief: how to make a successful claim – With R&D Tax Relief, the process that leads to a successful claim can be difficult, particularly when navigating through the hundreds of pages of HMRC’s submission requirements

R&D tax credits: What you need to know – Here are the common complexities of applying for R&D tax credits you need to know about