A target’s R&D claims are an asset and an exposure at once, and both sit in accounting periods that are still open when the deal completes. A run of paid claims tells a buyer nothing about whether they were right: HMRC pays first and asks its questions afterwards. Where relief was overclaimed it is repayable with interest and, depending on behaviour, a penalty — by the company the buyer now owns. Against that, relief nobody claimed in a period still open to amendment is value nobody has priced.
A competent review prices both, period by period. Two things then move with the deal itself: the target’s size status, and its intensity ratio.
Why does a paid R&D claim still carry risk?
Because payment is processing rather than agreement. HMRC says it aims to identify the need for a check before payment where it can, and that it also opens some checks after payment. HMRC checked around one in six R&D claims (17%) in 2023-24, the most recent year it has published. The money arriving proves only that the return was processed.
How long the exposure runs depends on the return. Where the return went in on time, HMRC has twelve months from the day it was delivered to open an enquiry. A return delivered late runs longer: to the 31 January, 30 April, 31 July or 31 October after the first anniversary of delivery. The twelve months also run from the filing date rather than the delivery date where the company is in a group that is not a small group, which usually lengthens them. And an amendment starts a clock of its own, ending on the next of those dates after the amendment’s first anniversary. So a claim added to an old return shortly before exchange does not tidy that period up. It opens a fresh enquiry window on the amendment itself — which is to say, on the claim.
Once that window has closed, HMRC can still assess by discovery, and the outer limits run four, six and twenty years from the end of the accounting period according to behaviour; can HMRC make me pay back an R&D tax credit? sets those out and what recovery involves. What matters in diligence is that discovery is not automatic. For a period the company has already returned, HMRC needs either careless or deliberate behaviour, or non-disclosure — the officer could not reasonably have been expected to be aware of the problem from the information made available in the return, the claim and the documents filed with them. So a thin Additional Information Form works against the company: the less it disclosed, the easier that second route becomes.
What should the R&D file in the data room contain?
One folder per claimed period:
- The claim computation, reconciled to the CT600 and to the statutory accounts. Figures that tie to neither are the first thing an enquiry finds.
- The Additional Information Form as submitted, with its date. Mandatory for every claim since 8 August 2023, amendments included; a claim filed without one is invalid, whatever the work behind it was worth.
- Notification evidence for every period that needed it. The claim notification is a hard gate with no late route and no appeal, and it closes periods that otherwise look claimable.
- The technical narratives and the named competent professionals behind them — field, experience, and evidence they shaped the claim rather than being interviewed once at the end.
- Cost workings that trace to payroll and the ledger, with each apportionment basis recorded at the time. Cost categories and payments to connected parties are the two headings an enquiry tests hardest.
- The PAYE and NIC cap working, with any restricted amount carried forward.
- The subsidy and contracting positions for periods beginning before 1 April 2024. Those periods sit under the old schemes, where grant funding could restrict SME relief and contracted-out work was contested. Two 2024 tribunal decisions in our case-law register bear on this: commercial contract payments are not, in themselves, subsidies. Neither decision was appealed, and HMRC updated its guidance in February 2025.
- Who prepared each claim, and whether that adviser belongs to a professional body and is registered with HMRC. Every agent is named on the AIF, so the preparer is already attached to the company’s file.
- All correspondence with HMRC on any R&D claim, including checks closed without adjustment.
What is missing tells you as much as what is there. A target that cannot produce contemporaneous cost workings has already told you how the claim was made.
Does the acquisition itself change the target’s SME status?
It can, and the answer turns on the buyer’s own size rather than the combined figures. Company size for R&D purposes normally changes only after the thresholds are crossed in two consecutive years. That grace disappears where the enterprise whose figures are brought in is itself over the line — a partner or linked enterprise that, on its own figures, already exceeds the headcount limit or both financial limits. Where that is so, SME status ends for the period in which the acquisition happens, with no grace year. Where the buyer is not itself that large, the two-year rule survives and the change is absorbed, even though the combined figures breach. The opposite case has its own relief: a target outside the definition solely because of a large related enterprise is treated as an SME for the period in which an acquirer that is itself an SME takes control. The mechanism, and the point that a minority stake by a large corporate can be enough, is in what happens if my company outgrows the SME definition.
For accounting periods beginning on or after 1 April 2024, less turns on that than buyers expect. The merged scheme applies at every size, so a target that loses SME status carries on claiming on the same terms. What it loses is ERIS, which only loss-making, R&D-intensive SMEs can claim; the gap between the two is set out in rates by year.
The sharper trap is the intensity test ERIS turns on. Relevant R&D expenditure must be at least 30% of total relevant expenditure, and where the company is connected with another the ratio is worked out on the connected companies’ aggregate figures — connection on a single day in the period is enough to bring one in. A target that was comfortably R&D-intensive on its own numbers can therefore fail the test for the period of the deal, because the buyer’s trading subsidiaries have arrived in the denominator. Payments to a connected company come out of that denominator, and stay in the numerator where they would have qualified as R&D spend, so intra-group recharges are not counted against the company twice. That helps at the margin. It does not rescue a ratio broken by the scale of what the buyer has brought with it.
One relief pulls the other way, and it is narrower than it looks. A company that met the intensity condition in its most recent prior twelve-month period, and obtained ERIS for that period, is excused the intensity test for the period after. It is excused nothing else: it must still be an SME, still be trading, and still be loss-making. So the grace is no help where the acquisition has taken SME status with it. Model both tests together before completion; see the 30% intensity condition.
Is there unclaimed relief worth having?
Often, in owner-managed targets particularly, where development work has run for years without anyone framing it as R&D. The buyer’s model should list every period still open to amendment and ask whether a claim was made; the windows and the trap are in backdated R&D claims.
Two cautions before it reaches the price. Notification has already closed many periods to first-time claimants, so an unclaimed period is not automatically a claimable one; settle that before attributing value. A claim assembled in the fortnight before exchange also carries the enquiry risk of a claim assembled in a fortnight, and after completion it is the buyer who owns the company HMRC writes to.
How does the credit land in completion accounts?
As a debtor, and rarely at its headline value. The merged-scheme credit runs through a fixed sequence before any cash appears: corporation tax for the period, a notional tax deduction, the PAYE and NIC cap, corporation tax for other periods, an optional surrender to a group company, then any other sum owed to HMRC. Only what survives that is paid out. A model that treats the gross credit as cash overstates it, and a target with arrears on other HMRC liabilities may find it absorbed before it arrives.
The credit belongs in the year the spending happened, whatever year the claim was filed in, and the balance sheet entry splits between a debtor for the cash expected and a reduction in the corporation tax creditor; accounting for the merged R&D expenditure credit sets out the entries. Whether that receivable counts as cash, debt or working capital in the completion mechanism is for the deal accountants and the sale agreement.
Who carries the risk if a claim turns out to be wrong?
Whoever the documents say, which is why the R&D findings must reach the lawyers in usable form. In broad terms: warranties give the buyer a remedy where a stated fact proves untrue, disclosure cuts that remedy down for anything the seller has properly disclosed, and a tax covenant or tax indemnity is the seller’s promise to meet pre-completion tax liabilities as they fall due. Drafting any of it is for the solicitors on both sides.
What the R&D review contributes is the material those clauses are priced on: which periods remain open and until when, the exposure on each if HMRC takes a different view, and how much of it turns on behaviour rather than judgement. Whether a particular covenant reaches a particular clawback is a question about that document’s definitions, and one for the lawyers drafting it. What the parties can settle in advance is the number: those who never quantified the exposure end up arguing about it at the worst possible moment.
What should a seller do before the process starts?
Get the file straight while the people who did the work are still employed: competent professionals move on, ledgers get migrated, and a narrative reconstructed after the fact reads like one.
Three things repay the effort. Assemble the file a buyer will ask for, period by period, before the data room opens. Settle the notification position on every period still open, because a period that cannot be claimed is not value worth arguing over. And take any unclaimed relief while the amendment window is still yours: claimed before exchange it is cash in the business, found by the buyer it is a line in the price adjustment. Quantified and documented, the R&D position is also what makes proper disclosure possible.
Where nobody outside the process has read the claims, our free claim review is a confidential second opinion under a mutual NDA, with no obligation to take anything further.
Talk it through with a chartered adviser
R&D diligence is quick when the file is in order and slow when it is not. 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 buying or selling a company with R&D claims in its history, get in touch.
Sources
- FA 1998 Sch 18 para 24 — the twelve-month enquiry window running from the day the return was delivered, the quarter-day windows for a late-delivered return and for an amendment, and the variation for a company in a group other than a small group.
- FA 1998 Sch 18 paras 42 and 43 — discovery for a period the company has returned is available only in the circumstances of paragraph 43 or paragraph 44, the first of which is a loss of tax brought about carelessly or deliberately by the company or a person acting for it.
- FA 1998 Sch 18 para 44 — the second route: the officer could not reasonably have been expected to be aware of the situation from the information made available in the return, the claim and the documents accompanying them.
- FA 1998 Sch 18 para 46 — the four, six and twenty-year assessment limits, by behaviour.
- HMRC’s approach to R&D tax reliefs 2023 to 2024 — HMRC aims to identify checks before payment where possible, and also opens some compliance checks post-payment.
- CTA 2009 s1120 — qualification 2: the transition period is disregarded only where the partner or linked enterprise, on its own figures, exceeds the employee limit or both of the financial limits, and the company taken alone satisfies the employee limit and at least one financial limit.
- CTA 2009 s1120B — a company treated as an SME for the period in which control of it is acquired by a company that is itself an SME.
- CIRD92000 — HMRC’s manual: the transition period requiring the position to be repeated for a second consecutive year, its disapplication where partner or linked enterprise figures that already exceeded a threshold are brought in, and the takeover example.
- CTA 2009 s1044 — the ERIS conditions: SME status, the intensity condition or the one-year grace for a company that obtained ERIS for its most recent prior twelve-month period having met the condition then, a trade, and a loss.
- CTA 2009 s1045ZA — the 30% intensity condition, the aggregation of connected companies on both sides of the ratio, the exclusion of payments to a connected company from total relevant expenditure under subsection (6)(a) and their retention in relevant R&D expenditure under subsection (7)(a), and connection on any day in the period.
- CTA 2009 s1042B — entitlement to the merged-scheme credit, which carries no size condition.
- CTA 2009 s1042I — the seven steps through which the credit is applied, with cash payment last.
- Submit detailed information before you claim — the Additional Information Form must reach HMRC before or with the Company Tax Return, and a claim submitted without it is not accepted.
- SI 2023/813 — the Additional Information Form regulations, in force 8 August 2023, and the information the form must contain.