If you run a marketing, digital, or creative agency, you have probably heard that R&D tax credits are available for software development, automation work, and technical problem-solving. You may have claimed them. Or you may be thinking about it.
But there is a question that comes up more often now than it did five years ago: what happens if HMRC investigates the claim?
The short answer is that HMRC opens enquiries into roughly 1 in 6 R&D claims [1]. For agencies, the rate can feel higher, because HMRC has been paying close attention to the SME scheme in particular. In 2021 to 2022, around half of all SME claims were non-compliant in part or in full, and 30% were non-compliant entirely [2]. That is a staggering number. And it explains why HMRC is looking harder at every claim that lands on their desk.
This article covers the specific triggers that can lead to an R&D tax credit investigation for an agency, what the process looks like, and how to build a claim that holds up to scrutiny.
Why HMRC Is Paying More Attention to R&D Claims
R&D tax credits have grown fast. In 2014 to 2015, total claims were £3 billion. By 2022 to 2023, that figure had risen to £7.5 billion [2]. More money in the system means more error and more fraud. In 2021 to 2022, HMRC estimated that £1.3 billion of the £7.6 billion claimed was either error or fraud, a rate of 17.6% [2]. The vast majority of that, £1.2 billion, sat in the SME scheme, where the non-compliance rate hit 25.8% [2].
HMRC responded by tightening the rules. The updated guidelines for what qualifies as R&D apply to accounting periods beginning on or after 1 April 2023 [3]. Claim numbers have already dropped. SME claims fell from 71,905 in relation to 2021 to 2022 to 55,325 in relation to 2022 to 2023, a drop of around 23% [2].
HMRC is also collecting more tax through compliance activity. In the 2023/24 tax year, they brought in an additional £1.2 billion from compliance work [4]. The tax debt balance stood at £45 billion as of March 2024 [4]. And HMRC has introduced a 'one-strike' policy for persistent late payers, affecting over 1,000 businesses since April 2024 [4]. The message is clear: HMRC is taking a tougher approach across the board.
For agency founders, this means your R&D claim is more likely to be reviewed than it would have been three years ago. Understanding the triggers is the first step to avoiding a problem.
What Triggers an R&D Tax Credit Investigation for an Agency
HMRC does not investigate claims at random. There are specific patterns and risk factors that cause a claim to be flagged. Here are the most common triggers for agencies.
Large first-time claims
Any large first-time R&D claim is likely to be reviewed by HMRC and has the potential to be enquired into [5]. If your agency has never claimed before and suddenly submits a claim for £50,000 or more, HMRC will want to understand why. They will ask what changed. Was there a genuine new project? Or has the agency been doing the same work for years and only now realised it might qualify?
First-time claims that cover multiple years are a particular red flag. A claim covering two or three years of retrospective work looks like a fishing expedition unless the technical narrative is tight.
Claim values that are high relative to turnover
If your agency turns over £400,000 and claims £120,000 in R&D costs, that is 30% of your revenue going into R&D. HMRC will question whether that proportion is realistic for an agency. Agencies typically have lower R&D intensity than dedicated software houses or engineering firms. A claim that represents a very high percentage of turnover will attract attention.
The same applies to claims that are high relative to staff costs. If your agency has five people and you are claiming all five as full-time R&D workers, HMRC will want to see evidence that their day-to-day work genuinely involved resolving technological uncertainty.
Poorly defined qualifying projects
This is the most common reason claims fail. To qualify as R&D, the work must constitute an advance in the overall knowledge or capability in a field of science or technology, not just an advance in your own company's knowledge [3]. Building a standard WordPress site with a custom theme does not qualify. Building a new image recognition tool that processes visual data in a way that has not been done before might qualify.
HMRC also looks at whether the activities fall to be accounted for as R&D under GAAP [3]. If your internal accounting does not treat the work as R&D, HMRC will ask why you are claiming it as such for tax purposes.
The guidelines specifically exclude certain activities from the scope of R&D for tax purposes [3]. Routine development, aesthetic changes, and standard configuration work do not count. Agencies that claim for these activities are at high risk of an enquiry.
Inconsistent or vague technical narratives
HMRC reads the technical report. If the narrative is generic, uses template language, or does not name specific technological uncertainties, the claim will be flagged. A good technical report names the problem, explains why the solution was not obvious to a competent professional in the field, and describes the work done to resolve it.
If your technical report reads like a marketing brochure, HMRC will open an enquiry.
Sector-focused HMRC campaigns
HMRC sometimes focuses on specific sectors. If digital agencies or software development firms are under the spotlight in a given year, your claim is more likely to be reviewed [5]. There is no public list of which sectors are being targeted, but patterns emerge from enquiry rates. If you hear that other agency founders are receiving enquiry letters, expect that your own claim may be reviewed.
Inconsistencies in the company tax return
HMRC cross-references your R&D claim with the rest of your CT600. If your turnover has dropped but your R&D claim has increased, that is a flag. If your staff costs have stayed flat but your R&D claim has doubled, that is a flag. If your corporation tax computation shows a different treatment of the same costs, that is a flag [5].
HMRC has access to your full tax history. They can see patterns you might not notice yourself.
Claims prepared by unqualified or aggressive advisors
HMRC knows which firms submit high-risk claims. If your R&D claim has been prepared by a firm that specialises in maximising claim values rather than building defensible submissions, your claim is more likely to be investigated. This is not about small firms versus large firms. It is about methodology. A claim that uses percentage allocations without justification, or that includes costs that are clearly not qualifying, will be flagged.
As ICAEW qualified accountants, we see claims that have been prepared by non-specialist bookkeepers or by R&D claim mills that have no understanding of agency operations. Those claims are the ones that get opened up.
What Happens During an HMRC R&D Enquiry
An HMRC enquiry is a request for further information [5]. It is not an accusation of fraud. It is HMRC saying, "We need to understand this claim better before we pay it."
The process typically starts with a letter asking for specific documents. HMRC may ask for:
- A detailed technical narrative for each qualifying project
- Timesheets or time records showing who worked on what
- Project plans, technical specifications, or design documents
- Financial breakdowns of the costs claimed
- Evidence that the work was funded and directed by the company
HMRC aims to process R&D tax credit claims within 28 days [5]. But once an enquiry is opened, that timeline goes out the window. Enquiries can take six to twelve months to resolve, sometimes longer if the claim is complex or the evidence is poor.
If HMRC decides the claim is invalid, they can disallow up to 100% of the value [5]. They can also charge penalties if they believe the claim was made negligently or dishonestly. In 2023/24, HMRC opened 2,300 new criminal investigations into tax fraud [4]. Most R&D enquiries do not reach that level, but the risk exists for claims that are deliberately inflated.
How to Build a Defensible R&D Claim as an Agency
The best way to handle an HMRC enquiry is to avoid triggering one in the first place. That means building a claim that is accurate, well-documented, and clearly within the rules.
Start with the right definition of R&D
To qualify as R&D, the work must seek an advance in science or technology [3]. That advance must be in the field as a whole, not just in your own knowledge. For agencies, this typically means work involving software development, algorithm design, data processing, or automation where the outcome was not known in advance.
If your team spent three months building a standard CRM integration, that is not R&D. If they spent three months figuring out how to process unstructured visual data in a way that no existing library could handle, that might be R&D.
The key question is: was there technological uncertainty that a competent professional could not resolve through routine methods?
Document the work as it happens
Retrospective claims are harder to defend. If you are planning to claim R&D tax credits, set up a system to track qualifying projects from the start. Use project management tools to log the technical challenges, the approaches tried, and the outcomes. Keep timesheets that separate qualifying work from non-qualifying work.
When eligibility is determined by the nature of the work, not by the individual's job title or professional background [3], your records need to show what people actually did, not just what their role was.
Write a proper technical narrative
The technical report is the most important document in your claim. It should name the specific technological uncertainties, explain why they were not routine, and describe the work done to resolve them. It should be written in plain English, not jargon. It should be specific enough that a competent professional in your field would recognise the challenges.
If you cannot write that narrative yourself, work with an advisor who understands both the R&D rules and agency operations. Our team at Agency Founder Finance works with digital agencies and creative agencies to build claims that hold up to scrutiny.
Get the financial breakdown right
Only certain costs qualify: staff costs, software licenses, consumables, and externally provided workers. Overheads do not qualify. Subcontracted R&D has its own rules. Make sure your financial breakdown matches the technical narrative. If you claim 40% of a developer's time as R&D, be ready to show how you arrived at that percentage.
HMRC will look at the numbers. If they do not match the story, the claim will be questioned.
What to Do If You Receive an Enquiry Letter
Do not ignore it. HMRC sets deadlines for responses, and missing them can result in the claim being automatically denied.
Contact your accountant immediately. If your claim was prepared by a third-party R&D specialist, bring them into the conversation. You need someone who understands both the technical and financial aspects of the claim.
Gather the evidence. Pull together the project documentation, timesheets, and financial records that support the claim. If the evidence does not exist, be honest about it. HMRC is more likely to accept a reduced claim than a fabricated one.
Respond to HMRC's questions directly. Do not provide more information than they ask for, but do not withhold information either. A clear, concise response that addresses their specific concerns is more effective than a data dump.
If you are not confident in the claim, consider withdrawing it and resubmitting a corrected version. This is better than fighting an enquiry you are likely to lose.
Final Thoughts
R&D tax credits are a legitimate relief for agencies that do genuine technical development work. But the era of loose claims is over. HMRC is investigating more, paying out less, and taking a harder line on non-compliance.
If you are considering an R&D claim, or if you have one under enquiry, speak to an accountant who understands agency operations and the R&D rules. We work with marketing agencies, web design agencies, and PR agencies to build claims that are accurate, defensible, and compliant.
If your contractor mix has changed in the last 12 months, or if you are preparing your first R&D claim, ask your accountant before year-end. A well-prepared claim is far less likely to trigger an investigation.
Sources
- ilbyjones.co.uk: What are the Risks of Submitting a Claim for R&D Tax Credits?
- gov.uk: Approach to Research and Development tax reliefs 2023 to 2024
- aka.hmrc.gov.uk: CIRD81300 - R&D tax relief: conditions to be satisfied: the definition...
- icaew.com: Government takes further action to reduce tax debt - ICAEW.com
- taxqube.co.uk: What triggers R&D tax credit investigation? - TaxQube