Research & Development, good news at last!
As we have recently reported, HMRC have been taking a very strict and often unhelpful approach to research and development claims, particularly for those producing new software.
In a significant development, HMRC recently lost a case at the first-tier tribunal against software company Get Onbord Ltd who had produced an innovative piece of software. The key issue was whether the company’s activities fulfilled the criteria set out in the BEIS guidelines.
The Tribunal concluded that on the balance of probabilities that Get Onbord’s activities did meet these guidelines and allowed the claim.
This decision highlights that using existing tools and open-source software does not disqualify a project from being considered research and development, provided the project demonstrates substantial innovation beyond routine development.
Research and Development, the devil is in the detail!
As ever the devil is in the detail, but we have highlighted some of the key points from the case below:
• HMRC argued that Get Onbord Ltd’s (GOL) project was not an advancement in the overall knowledge or capability in the software industry, so couldn’t be R&D. The project aimed to develop a novel, automated AI analysis process for know-your-client (KYC) procedures which was more detailed than manual checks or other existing products.
• HMRC did acknowledge that GOL’s technology was “impressive,” but they still persisted in saying that the product did not achieve a significant advance. They were reliant on paragraph 12 of the BEIS guidelines which do have the power of law unlike other guidance: “the routine analysis, copying, or adaptation of an existing product, process, service, or material will not be an advance in science or technology.” HMRC were arguing that the product used readily available technologies so was not advancing the field of technology. GOL were able to demonstrate weaknesses in existing technologies, evidencing a clear technological gap which they were able to plug.
• HMRC’s Chief Digital Information Officers reviewed the R&D but concluded no R&D had taken place without providing supporting reasons. For GOL Mr Cahill, a former director of the company, who had over 25 years of experience, explained that the project created new knowledge and capability using existing code, emphasizing that most software development builds on existing code rather than starting from scratch. He was therefore able to show that he was a competent professional in the field.
• On the contrary the Tribunal noted that the HMRC caseworker present at the hearing lacked software experience and was therefore not a competent professional themselves. They had relied on HMRC’s digital team for an opinion on the case but were unable to specify the credentials of the HMRC digital team consulted.
Tim Humphries our Tax Partner, added, “the most helpful elements of this were the clarity the Tribunal was able to provide and this will undoubtably help other and future cases”. This includes:
• The burden of proof lies with the company making a research and development tax claim, but in cases of ‘shifting the evidential burden,’ the claimant must show a technological advance, after which HMRC must provide material to counter this.
• The tribunal emphasised that using open-source or existing materials does not necessarily indicate routine development. The determination of an overall advance must be case-specific, considering whether the development is routine or readily discernible, not whether each component is novel.
If you would like to discuss Research & Development tax and whether your business might be eligible to make an R&D claim, please contact us on 020 7870 9050.
