We want to ensure you’re well-informed about recent communications from HM Revenue and Customs (HMRC) regarding Research and Development (R&D) tax relief claims, particularly for companies in the retail sector. HMRC has recently issued a letter highlighting concerns about ineligible R&D claims, and we’re here to guide you on how to respond responsibly to avoid potential financial risks.

Understanding HMRC’s Concerns

HMRC has noted that agents and third parties are targeting retail businesses, encouraging them to make R&D tax relief claims. However, many of these claims are ineligible because the activities don’t meet the strict criteria for R&D tax relief. This relief is designed for companies undertaking activities that seek an advance in science or technology, contributing to the broader field—not just improving internal processes or knowledge.

Retail businesses are particularly at risk of being misled into making invalid claims. Common activities like developing new products, analysing customer purchasing patterns, adopting off-the-shelf e-commerce or stock management systems, or using third-party packaging solutions typically do not qualify as R&D. Submitting incorrect claims can lead to serious consequences, including repaying any relief received, plus interest and potential penalties.

The Cost of R&D Fraud

The cost of research and development (R&D) fraud to the UK economy is significant, with estimates focusing specifically on the abuse of R&D tax relief schemes. According to HM Revenue and Customs (HMRC), the estimated cost of fraud and error in R&D tax credit claims from 2020-21 to 2023-24 totals over £4.1 billion.

These figures reflect fraudulent or incorrect claims within the R&D tax relief system, which was designed to incentivize innovation but has been exploited through exaggerated or ineligible claims, such as pubs claiming tax credits for changing menus or window cleaners for bucket innovations. Most of the non-compliance occurs in the small and medium enterprise (SME) scheme.

While broader fraud estimates (encompassing all types of fraud, not just R&D) range from £130 billion to £219 billion annually across the UK economy, the specific focus on R&D fraud highlights a concentrated issue within the tax relief system. HMRC has responded by increasing scrutiny, introducing digital claim requirements, and establishing an R&D Anti-Abuse Unit, which has blocked £85 million in fraudulent claims and led to arrests.

What You Should Do

To protect your business and ensure compliance, we recommend the following steps:

1. Be Cautious of Unsolicited Offers from R&D Agents

Some agents may contact you, claiming your routine business activities qualify for R&D tax relief, often on a “no win, no fee” basis. Be wary of such promises, as they may not accurately reflect HMRC’s requirements. These agents may also claim that your business is at no risk of investigation, which is misleading. If a claim is found to be incorrect, your company will be liable for repaying any relief received, along with interest and possible penalties.

2. Verify Eligibility Before Making a Claim

Before considering an R&D claim, carefully review HMRC’s guidance on what qualifies as R&D. The activity must involve a genuine attempt to advance science or technology, not just adapt existing solutions for your business. For detailed guidance, visit GOV.UK and search for ‘Research and Development tax relief’. If you’re unsure, consult with us directly to assess whether your activities meet the criteria.

3. Protect Your HMRC Login Details

Never share your HMRC login credentials with third-party agents. Doing so could compromise your security and lead to unauthorized access to your tax information. For more advice, see GOV.UK’s guidance on keeping your HMRC login details safe.

4. Consult Your Existing Tax Agent

If you’re considering hiring an R&D agent, discuss this with us first. We can help you evaluate the legitimacy of any third-party offer and ensure any claim aligns with HMRC’s rules.

5. Seek Extra Support if Needed

If you have personal circumstances that make dealing with HMRC challenging, let us know. HMRC offers additional support for those who need it, and we can help you access these services. Visit GOV.UK and search for ‘Get help from HMRC if you need extra support’ for more information.

Why This Matters

Making an incorrect R&D tax relief claim can have significant financial consequences, including repaying the full amount of relief received, plus interest and penalties. As retail businesses, your day-to-day activities—such as adopting new software, analysing customer data, or using third-party packaging—are unlikely to qualify. By taking a cautious and informed approach, you can avoid these risks and ensure compliance with HMRC’s regulations.

How We Can Help

As your accountancy practice, we’re here to provide clarity and support. If you’ve been approached by an R&D agent or are considering an R&D claim, contact us before taking any action. We’ll review your activities, assess eligibility, and provide an opinion. Our goal is to protect your business from unnecessary risks while maximizing legitimate tax-saving opportunities. We are unable to assist with R&D Claims and submit them though, on your behalf. For more information or to discuss your specific situation, please reach out to our team. We’re here to help you navigate HMRC’s guidance and make informed decisions.

What the letter says