R&D enquiries

Time for HMRC to adapt its approach?

Mark Ayre, Director, Tax Resolutions

HMRC’s approach to enquiries into R&D claims in recent years has faced considerable criticism from those in the tax profession. Advisors have accused the department of being inflexible and unwilling to accept the evidence and explanations provided by companies in support of their claims, while HMRC argue that a tough stance is needed to combat the significant number of fraudulent claims made each year.

A common theme with advisors’ frustrations is that, after providing HMRC with a substantial amount of information to support their client’s R&D claims, all too often they receive a response along the lines of ‘we do not believe that your client’s claim qualifies for relief, as the project does not achieve the required technological advance’ but with little robust explanation to support this conclusion. Further representations then made by the client typically fall on deaf ears and, disappointingly, requests for meetings with HMRC’s internal technical specialists, as a pragmatic way of moving the enquiry forward, are frequently denied.

Recent Tribunal case

However, following the recent First Tier Tribunal (FTT) case of Get Onbord Ltd, could we start to see HMRC adopting a more common sense approach to R&D enquiries?

Get Onbord Limited (GOL), developed an artificial intelligence-based software for 'know your client' (KYC) verification and risk profiling, which it believed was an appreciable improvement in the current technologies associated with AI for KYC purposes. In a familiar tale, HMRC rejected GOL's claim on the basis that its project did not advance overall knowledge or capability and therefore did not amount to qualifying R&D. The HMRC officer was impressed with the product but stated “I believe the product produced, has used existing processes and technologies that were readily deducible to produce a new innovative product."

During the FTT hearing, the appellant explained that “every piece of code is built on existing code; nobody writes code from scratch. Why would you when someone else has already done the work? GOL works by taking components and adding to them. It is rare for a software development to be completely novel”

Key issues

This highlights one of the key issues with R&D enquiries. While HMRC’s technical specialists may be experts in R&D tax relief rules, they are not technological or scientific experts in every possible area a claim can be made for, and it would be unrealistic to expect them to be. Therefore, is it not important for HMRC to be flexible in their approach and to welcome more meetings and calls with clients, while also being more open with their own conclusions? The FTT certainly thought so in GOL:

“We consider that these proceedings would have been much more straightforward (and possibly could have been avoided) if, at an early stage, both parties had "put their scientific cards face up on the table… our experience in this case would lead us to suggest this as an approach which might usefully be considered where similar issues arise.”

The FTT also acknowledged that, while the burden of proof was on GOL to justify its R&D claim “…there may come a point where GOL can say something along the lines of, "We have done enough to raise a case that our project comprised an overall advance in science and technology. What more can the Tribunal expect from us? The burden must now pass to the Revenue to produce some material to show that, despite what appears from everything we have produced, our project was a routine advance.”

Will HMRC take note of these comments and adapt the way it approaches R&D enquiries? Those in the tax profession will certainly hope so.