Everyone reading this will be aware that in the last couple of years in particular, HMRC has taken to challenging many, if not all, R&D tax credit claims submitted.
Two recent decisions (by the First Tier Tribunal) – Get Onbord Ltd (in liquidation) v HMRC [2024] UKFTT 617 and Tills Plus v HMRC [2024] UKFTT 614 bring helpful news to claimants. But there are some key lessons to be learnt from these.
Background
The legislation is in CTA 2009 Part 13 (various sections). Statutory Instrument 2004/712 state that research and development activities are to be those set out in the Guidelines on the meaning of research and development for tax purposes issued by the Secretary of State for Trade and Industry (the ‘BEIS Guidelines’) on 5 March 2004 (updated in March 2023).
The BEIS Guidelines state that R&D projects are those which “seek to achieve an advance in science or technology” which involves resolving “scientific or technological uncertainty”. Para 6 of the Guidelines states that “an advance in science or technology” means an advance in “overall knowledge or capability in a field of science or technology” as compared to simply advancing the capabilities of the particular claimant company.
On the face of it, therefore, this places a very high barrier on the ability to claim R&D tax relief, but the Guidelines then go on to substantially moderate that burden. I could expand on this considerably, but for the purposes of this article, suffice it to say that where we get to is that even though Para 6 appears to require the pushing forward of the boundaries of a field of science or technology, qualifying R&D can include replicating someone else’s trade secret, or improvements and modifications that are not routine or readily deducible by a competent professional. It can also apply to work concerning the uncertainties faced when combining existing science or technologies in a new or novel way.
Where are we at the moment?
My recent experience is that HMRC generally places the burden too high, focusing excessively on the Para 6 argument and not giving sufficient weight to the rest of the guidelines.
The Get Onbord case examined this particular point. The Tribunal, amongst other things, concluded that if new functionality, using considerable amounts of new code, had been created, then it was not necessary for the claimant company to demonstrate that the individual component parts of their system were novel or bespoke. The FTT said that “if complete novelty were the test, no software project would ever amount to R&D”. The FTT emphasised that it was not looking to create any new principles of law. It noted that:
“We have reached our decision simply by asking ourselves whether, on the basis of the evidence we have read and heard, we think it more likely than not that Get Onbord’s arguments are correct. Our answer to that question is yes.”
The other key point coming out of the Get Onbord case was surrounding the evidence to back up the claim. It was held that as the company had shown that it was working on a product that was not available in the market, and which required the input from a large number of specialist professionals and dealt with new problems which were not yet solved, then it had presented reasonable evidence to support its claim. HMRC needed to explain why it did not qualify and needed to present evidence in support of that.
The evidence requirement is further backed up by the Tills case. In this case, whilst it is likely that the work carried out would probably have been admissible as qualifying R&D, the company had failed to present a report adequately explaining the work and therefore the claim failed.
What should claimant companies do to put themselves in the best position?
- There must be sufficient evidence to establish the case.
- “Evidence” should be contemporaneous (prepared at the time) and not produced after the event.
- Companies should devise systems to keep copies of email, Slack messages, and other types of communication used to evidence the R&D being performed on a day to day basis (think old-fashioned lab books!).
- Oral evidence is often required if a dispute progresses; this will carry much more weight if it is based on records/notes kept at the time.
- Consider keeping a full “story book” of what happened. If HMRC enquires, don’t just answer the specific questions but present the full picture.
Conclusions
Despite the pendulum of evidence being somewhat reset, companies need to help themselves. Investment upfront can make the defence of an R&D enquiry so much easier to manage.
