An R&D tax credit in a set of accounts is an estimate that depends on a third party, and it is audited as one. The auditor needs to see that a valid claim exists, that the amount was computed correctly, that it belongs in the period being audited, and that the company will actually receive it. All four answers sit in documents the company should already hold. Audits stall when the claim was prepared as a tax filing and never assembled as an evidence file.
Where the credit sits in the accounts, and when it is recognised, is covered in accounting for the merged R&D expenditure credit under FRS 102, with the differences for micro-entities and IFRS reporters in R&D tax credits under FRS 105, IFRS and FRS 101; everything here takes that treatment as read.
What is the auditor actually testing?
Existence, measurement, cut-off and recoverability, with going concern and subsequent events alongside them where the amounts are material. ISA (UK) 500 sets the general requirement of sufficient appropriate evidence, and for an R&D credit that evidence is almost entirely documentary, because HMRC does not confirm claims: it processes them, pays most of them, and checks afterwards. Cash received can be confirmed from the bank and the company’s HMRC account; entitlement cannot be confirmed by anyone outside the company, so the strength of its own file decides how much comfort the balance can carry.
Is there a valid claim at all?
Four gates decide it, and a claim can pass every technical test and still fall at one of them.
The claim notification. A first-time claimant, or a company that has not claimed in the three years ending with the notification deadline, must have told HMRC within six months of the end of the period of account. Miss it and there is no claim for the year, whatever the technical merits. The requirement runs from accounting periods beginning on or after 1 April 2023; earlier periods had none. The evidence is HMRC’s submission reference and a copy of what was notified.
The Additional Information Form. Mandatory with every claim, and it has to reach HMRC before or on the same day as the return, with the form sent first where both go the same day. Where the return arrives ahead of it, HMRC writes to say it is removing the claim. The evidence is the form as submitted, not a draft.
Entitlement. The company must be within the charge to corporation tax and carrying on a trade the R&D relates to. Which scheme applies is fixed by the accounting period, and it decides where the benefit lands: ERIS sits within the tax charge rather than above the line.
Going concern, in its statutory sense. A separate tax condition gates the payable element, and it is not the test the auditor is applying. The conditions are on who can claim R&D tax relief; how it interacts with the audit is dealt with further down.
Behind those gates sits the substance: a named competent professional who can explain the advance sought and the uncertainties resolved. A claim with nobody identified would struggle under a compliance check, which feeds straight into recoverability.
Is the amount right?
The figure in the accounts is rarely the gross credit, and the gap is where most measurement queries begin. A merged-scheme credit of 20% of qualifying expenditure passes through seven steps in a fixed order before any of it becomes cash. It discharges the period’s own corporation tax first, then absorbs the notional tax deduction, then loses anything above the PAYE cap. Only after that does it reach corporation tax for other periods, surrender to a group company, and the company’s other debts to HMRC. What survives all seven is paid. Two companies with identical qualifying spend can end up carrying very different debtors.
Three points repay attention.
- The rate for the period. Rates are fixed by the accounting period, not the filing date, so a company amending an older return is using that year’s figures. R&D tax relief rates by year has the series.
- The PAYE cap. £20,000 plus three times the company’s relevant PAYE and national insurance liabilities, with the £20,000 reduced proportionately where the accounting period is shorter than twelve months. Establish first whether the cap applies at all: a company that creates or manages its own intellectual property through its own employees, and spends little with connected parties, is outside it altogether. Where it does, check the short-period reduction was made. Short periods are where cap errors cluster.
- The notional tax. For a loss-maker this is withheld from the payable amount, so the cash figure and the accounting figure part company. Whether it is charged in the year or carried as an asset is the judgement our FRS 102 guide sets out, and the audit needs the working rather than the answer.
One computation should answer all three points, and where that reconciliation does not exist the audit is being asked to build it.
Is it in the right period?
Cut-off here is a question about the underlying expenditure rather than about the claim. The credit belongs to the year the R&D was done, and the recognition question is dealt with on the FRS 102 page. What the audit needs is evidence that the spend falls inside the period: payroll records for the staff claimed, purchase ledger entries for consumables and subcontractors, and apportionments with a stated basis rather than a round percentage.
The recurring trap is a claim built months later from a project timeline rather than from the ledger. Work spanning the year end then contributes costs from both sides of it, and the claim summary hides the error because it is organised by project.
Will the company actually receive it?
This assertion carries the most judgement, and it is ISA (UK) 540 territory, because the estimation uncertainty here comes from outside the company entirely.
Three things bear on it. First, enquiry risk: HMRC checked around one in six R&D claims (17%) in 2023-24, the most recent year it has published. Second, payment is not approval — HMRC can enquire after paying, within the statutory time limit, so cash received before the audit report settles recoverability but not the risk of later clawback. Third, the cash can fall short of the credit itself.
That last point has two separate causes. HMRC need not pay at all while the return is under enquiry, or while the company’s own PAYE or national insurance for the period is unpaid, though an officer may still pay a provisional amount. Separately, and before payment is reached, the credit is applied against the company’s other debts to HMRC, VAT included, so arrears anywhere on the tax account reduce what arrives. Testing recoverability means looking at the whole tax account, not just the claim.
Whether any of that warrants a provision turns on the specific claim rather than on the base rate, and the claim file is what makes that judgement possible. Where a compliance check is already open the position is no longer general risk but a live dispute, which our guide to HMRC R&D enquiries describes.
What if the cash forecast depends on the credit?
Then two separate going-concern questions are in play, and they are easily confused. The first is the auditor’s own, under ISA (UK) 570. That evaluation has to cover at least the period management assessed, and in the UK at least twelve months from the date the accounts are approved. The second is the tax condition gating payment, which looks at whether the latest published accounts were prepared on a going concern basis, and whether they say that basis holds only because of an expected entitlement to the relief. That test has a hard edge the accounts cannot soften: a company in administration or liquidation is not a going concern for this purpose at all.
Read those together and the circularity appears. A forecast whose only route to solvency is the R&D credit is close to the case the tax rule is aimed at, and accounts saying so in terms can put the payable element at risk. Settle it before signing rather than after.
Timing compounds it. HMRC’s published aim is to pay 85% of payable tax credits within 40 days, or to contact the company within that time — and a letter asking questions meets the aim as fully as a payment does. A forecast assuming receipt on a particular date is assuming something neither the company nor its advisers control; how long an R&D tax credit takes to arrive covers what else can slow it.
What happens between the year end and the audit report?
For an R&D credit the list is short: the claim being filed, an agreed figure that differs from the accrual, receipt of the money, an enquiry letter, or a change in the company’s going-concern position. All of those fall inside ISA (UK) 560, which covers events between the date of the financial statements and the date of the auditor’s report, and facts that come to light after it. The last of them matters twice, because it bears on the accounts and on entitlement to the payment.
What can management representations do here?
Less than they are sometimes asked to. Written representations are audit evidence, but ISA (UK) 580 is explicit that they do not provide sufficient appropriate audit evidence on their own about any of the matters they deal with. A representation that the directors consider the claim valid does not stand in for the notification, the AIF or the competent professional’s account.
They do useful work on matters only management can attest: that the claim will be made, that all HMRC correspondence has been disclosed, and that the staff apportionment basis has been described completely.
What should the claim pack hand the auditor?
The claim pack’s schedule is described on our FRS 102 page. What matters for the audit is whether each figure can be tested and each gate evidenced:
- Qualifying expenditure analysed by cost category and by project, every figure reachable from payroll and the purchase ledger, with the staff apportionment basis stated precisely enough to re-perform.
- The notional tax and any PAYE cap restriction set out as workings rather than results, so the amount withheld and the amount carried forward can each be agreed.
- Evidence the procedural gates were cleared: the claim notification reference where one was required, and the AIF as submitted.
- The competent professionals, named, with the technical account of the advance sought and the uncertainties resolved.
- HMRC correspondence to date, including anything that might be a subsequent event.
None of that is prepared for the audit; it is what a defensible claim holds anyway. Where it exists the credit clears quickly. Where it does not, the queries tend to surface entitlement problems that cost far more than an audit delay.
Talk it through with a chartered adviser
Audit queries on an R&D credit are best answered from the file the claim was built on, not from a reconstruction assembled once the questions arrive. LimestoneGrey is a firm of Chartered Tax Advisers and Chartered Accountants, regulated by ICAEW, specialising in R&D tax relief. Every claim is signed off by a chartered adviser, and enquiry support is included as standard.
If you are preparing for an audit and want the claim documented so it answers these questions on sight, get in touch, or start with our R&D tax relief guide.
Sources
- ISA (UK) 500 (Updated September 2025), Audit Evidence (FRC) — paragraph 1: the standard “explains what constitutes audit evidence in an audit of financial statements, and deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence”.
- ISA (UK) 540 (Revised December 2018, Updated September 2025), Auditing Accounting Estimates and Related Disclosures (FRC) — the auditor’s responsibilities for accounting estimates, and estimation uncertainty as the concept that scales the work required.
- ISA (UK) 560 (Updated September 2025), Subsequent Events (FRC) — subsequent events defined as events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after that date.
- ISA (UK) 570 (Revised September 2019, Updated September 2025), Going Concern (FRC) — the auditor’s responsibilities relating to going concern; paragraph 13-1(a), requiring the auditor’s evaluation to cover at least the same period as management’s own assessment, and paragraph 14-1, requiring an assessment period of at least twelve months from the date of approval of the financial statements. A further revision, ISA (UK) 570 (Revised March 2026), applies to audits of financial statements for periods commencing on or after 15 December 2026.
- ISA (UK) 580 (Updated September 2025), Written Representations (FRC) — paragraph 4: written representations “do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal”.
- Merged scheme & ERIS guidance — “The rate of R&D expenditure credit under the merged RDEC scheme is 20%”, and the PAYE cap stated as £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities.
- CIRD112100: merged scheme payment steps — the seven steps from discharge of the period’s corporation tax through notional tax, the PAYE cap, other periods, group surrender and other liabilities to the amount payable, and the conditions on payment.
- CIRD80525: practice note for ISBC and WMBC — “Our aim is to pay 85% of payable tax credits within 40 days or contact you regarding the claim within 40 days”; the exclusions from that aim; and the statement that a decision to pay does not prevent an enquiry within the statutory time limit.
- CTA 2009 s1042I — the seven steps in their statutory order: corporation tax for the accounting period, the notional tax deduction, the excess over the PAYE cap, corporation tax for any other accounting period, group surrender, any other liability of the company to pay a sum to HMRC, and the amount paid to the company.
- CTA 2009 s1112B — the PAYE and NIC cap: £20,000 plus three times the company’s relevant PAYE and NIC liabilities, with the £20,000 proportionately reduced for an accounting period of less than 12 months, and the signpost on the face of the section to the cases where there is no cap.
- CTA 2009 s1112E — no cap at all where the company is engaged, wholly or mainly through its own employees, in creating or managing intellectual property the greater part of which it creates, and its connected-party externally provided worker and contractor expenditure does not exceed 15% of its qualifying expenditure.
- CTA 2009 s1112H — where the return is under enquiry the amount “does not have to be paid to the company”, but an officer “may make a payment on a provisional basis”; outstanding PAYE or NIC liabilities for the period likewise remove the obligation to pay. VAT is not among the conditions in this section; other HMRC debts are dealt with earlier, at step 6 of the calculation in s1042I.
- CTA 2009 s1112F and s1112G — the going concern condition on the payable amount, and the definition: latest published accounts prepared on a going concern basis, with nothing in them indicating that basis was adopted only because of an entitlement or expected entitlement to the relief. Subsection (2) adds that a company in administration or liquidation is not a going concern.
- CIRD191000: going concern — HMRC’s guidance on the condition and its effect under each scheme.
- FA 1998 Schedule 18, paragraph 24 — the enquiry window: twelve months from delivery of the return where it was filed on time. Where the return was filed late, or where the company amends it, the window instead runs to the next 31 January, 30 April, 31 July or 31 October following the first anniversary of that delivery or amendment. For a company in a group other than a small group the twelve months run from the filing date.
- Additional information you must submit before you claim R&D tax relief — the form must reach HMRC before or on the same day as the Company Tax Return, must be sent first where both go on the same day, and the claim is rejected and removed from the return where the return arrives ahead of it.
- HMRC’s approach to R&D tax reliefs 2023 to 2024 — 17% of claims checked in 2023-24, and HMRC’s description of the trade-off in post-payment checks.