If you’re looking for investment or selling your business, when you come to a financial due diligence (FDD) process, any R&D tax relief claim will form part of the review. It’s therefore very important that any R&D claim is prepared accurately.

While it may be tempting to utilise tax reliefs to gain extra cash throughout the early days of your business’s growth journey, poorly prepared R&D claims can impact you much later down the line. When you come to a financial due diligence (FDD) process the R&D claim will form part of the review of your company’s balance sheet and cash flow predictions. How can founders prepare for due diligence exercises, ensuring they can confidently address questions that arise as a result of their R&D claim?

Common issues we see

Due diligence often marks the first critical review of an R&D claim by a third party. If this process highlights issues with their R&D claims, a founder might be asked to potentially repay part of the claim if an error was made. Many companies assume that timely payouts from HMRC equates to approval of their claim. But as R&D tax credit claims are self-assessed this may not be the case, and the company might be sitting on a repayment liability.

Some of the issues with claims, that can be highlighted in the due diligence process, include:

• Incorrect cost claims: Misunderstandings about cost nature leading to errors and overstating qualifying spend.

• Subcontracted work restrictions: Misinterpretations around these restrictions can potentially lead to the inclusion of projects that should have been excluded.

• Documentation discrepancies: Costs not aligning with documentation or conflicting online information can raise questions about the overall validity of the claim, and potentially whether a claim should have been made at all.

A well-prepared claim with a full audit trail can easily address these questions and provide founders with much-needed peace of mind that a funding round or sales process will progress. However, rushed or boundary-pushing claims may struggle to satisfy due diligence teams.

What happens if the FDD process identifies any issues?

If the due diligence expert identifies issues with an R&D claim, these concerns will be raised with the founder to determine if there is a mistake or a misunderstanding that could lead to part of the claim being repayable to HMRC. Suspect claims may be treated as repayable liabilities if the answers do not convince the buyer or funder. Extensive issues can lead to significant repayable liabilities, but they may also lead the buyer to question the finance function's controls. While an R&D claim issue alone is unlikely to derail a sale or funding round, it can add friction and prompt further scrutiny of the seller's financial controls, complicating the deal process.

Sometimes, the issues highlighted are more complex and founders find themselves struggling to defend their R&D claim. This should be a trigger to consider whether it's time for a new R&D claims advisor and a refresh of the claim methodology to provide peace of mind that future claims are correct.

Having a specialist R&D advisor to support you and provide technically accurate answers is extremely important and provides peace of mind that the claim can be defended. Our R&D tax team works alongside our M&A and Transaction Services teams regularly to provide this support to our clients.

What happens if incorrectly claimed costs are found?

It is crucial that founders do not to ignore them. HMRC checks up to 20% of R&D tax credit claims and may open a compliance check, asking for all related documentation. If errors were highlighted at due diligence and not acted upon, HMRC will question why these problems were not disclosed. If issues are left and not addressed this can potentially lead to penalties and a strained relationship with HMRC.

Companies should clearly address all claim errors and approach HMRC with a voluntary disclosure. This proactive approach helps manage the disclosure process and is considered when calculating penalties. Our R&D and Tax Investigations teams collaborate with clients to manage disclosures, ensuring issues are resolved smoothly and quickly without damaging the relationship with HMRC.

Seeking funding or selling a business can be a highly stressful time as it is – having issues with an R&D claim can only make things more complicated. Ensuring your R&D process is reviewed regularly and tested against common due diligence issues can provide peace of mind that your claims will not cause major issues in any deal process.