Lee Sharpe looks at how the courts have treated some recent research and development claims that HMRC has rejected.
For broadly the last couple of years, HMRC has been ‘cracking down’ on claims for tax relief on qualifying research and development (R&D) by SMEs, involving a concerted effort to challenge a much greater proportion of claims than previously, as a targeted campaign of compliance checks or enquiries. These efforts have raised questions of competence – on both sides.
To qualify as R&D for a tax claim, the requirements may be rudely summarised as follows: The company must be able to demonstrate it has qualifying costs in a project that attempts to secure an advance in a field of science or technology (not just an advance in the company’s own knowledge, and that is also relevant to the company’s trade or intended trade), through the resolution of scientific or technological uncertainty – being something not readily available to, or deducible by, a competent professional working in that field.
There are numerous other conditions, such as whether the company is a going concern, has enjoyed ‘too much’ state aid, or whether the expenditure has been subsidised, but the previous paragraph is meant to cover the main theme.
The following tribunal cases cover key themes likely to be considered in the majority of R&D claims, and HMRC’s review of them.
Carelessness
H&H Contract Scaffolding v Revenue and Customs [2024] UKFTT 00151 (TC) is not really a case about qualifying R&D, but speaks more widely to HMRC conduct. The company had already conceded that its projects did not amount to qualifying R&D, but objected to HMRC’s assertion that it was liable to a penalty for carelessness – arguably, HMRC’s default approach to enquiry work in general, caught by the judge as:
“The Tribunal does not accept [HMRC’s] case that where the taxpayer cannot show that it qualified for a given relief then it follows that the taxpayer will have been careless, since that would entail the mere existence of an inaccuracy determining that the same inaccuracy was careless” (emphasis added).
Readers might muse that the court’s assertion that an inaccuracy is not automatically careless will be news to a good proportion of HMRC officers. The judge had similarly choice words for HMRC’s argument that the taxpayer had to prove that it was not careless, rather than for HMRC to prove that the taxpayer was careless in the first place.
Not the competent professionals we need
Flame Tree Publishing v Revenue and Customs [2024] UKFTT 00349 (TC) involved a traditional publisher engaging with the digital age, and claiming for costs incurred in that transition. While there may have been innovation in the broader sense, the claim fell down when the company tried to argue that its employees, who were no doubt competent professionals in the publishing world, also qualified as competent professionals in software and programming – crucial to the projects involved.
Without evidence that a competent professional would stand up and say: “This exercise was innovative or not readily deducible to a professional working in this field”, the company’s claim failed (but note that a competent professional does not have to hold a degree or professional qualifications and may be qualified by experience, so long as it is in the fields being tested).
The right competent professional…but not at the right time
Tills Plus Ltd v Revenue and Customs [2024] UKFTT 00614 (TC) also involved IT and programming but was a more complex case. In one of the threads to this case, there arguably was a (relevant) competent professional involved in making the report to assist the claim, but with little evidence or reasoning to back up their opinion given in their report.
Alas, nor were they subsequently available at the hearing to provide further evidence to the court; had they been available, the court might have upheld the claim based on that further evidence.
HMRC cannot keep saying: “Not enough evidence”
Get Onbord Ltd v Revenue and Customs [2024] UKFTT 617 (TC) also involved IT and programming. There were various parts to this quite long case but one particular aspect, with which those involved with R&D claims will likely be painfully familiar, was that HMRC’s position after opening the enquiry was repeatedly reworked along the lines of:
Thank you for providing copious evidence that you are trying to make an appreciable advance in (science or) technology. Unfortunately, we are just not satisfied that there has been an appreciable advance in (science or) technology…and we think everything was readily deducible to a competent professional.
HMRC seemed to believe that its approach was unassailable; the company has to prove its case, and if HMRC really does not want to believe, then it’s ‘hard cheese’.
The tribunal was very much on the side of the hard-working taxpayer on this. While it is inarguably the case that the company must justify its claim, at some point HMRC also has to explain why it still disagrees in the face of the company’s mounting good evidence.
One or two other comments by the judge in this case will also ring true to claimants over the last few years:
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The taxpayer complained of HMRC’s “lack of scientific knowledge and rigour.”
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“Despite asking, [the claimants] were unable to speak to anyone at HMRC who had domain expertise.”
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“The HMRC officer responsible for this case…was in a difficult position, as he has no technology experience or expertise.”
If at first you don’t succeed…
In Collins Construction Ltd v Revenue and Customs [2024] UKFTT 00951 (TC), perhaps surprisingly, HMRC did not argue that the projects qualified on the “technological uncertainties” aspects but more on the fact that the company was being paid by another party to undertake the work – so it was ‘subsidised’ or ‘contracted-out’ and therefore ineligible for the enhanced relief (in other words, another party was bearing the real cost of the R&D, so Collins Construction itself should not qualify).
This was an argument adopted by HMRC from a previous case (Quinn London Ltd v Revenue and Customs) [2021] UKFTT 437 (TC)), which HMRC comfortably lost. HMRC clearly dislikes the idea that a company should be earning profits from work that involves R&D, even though a fundamental premise of the R&D tax regime is that the company’s R&D should assist the trade from which it earns its profits.
It is particularly precious that HMRC wheeled out a big gun as a witness – a technical adviser on HMRC’s R&D Policy Team; an expert in the history of the statutory provisions, the consultation process and on HMRC’s view of the aims and purpose of the statute. His offerings were roundly ignored, and HMRC’s arguments were comprehensively demolished. It might be said that HMRC also sometimes brings the wrong competent professional into the fray.
Simply put, the courts have consistently found that it is perfectly okay to be paid to do work under a commercial contract that in consequence involves R&D being undertaken by the claimant company, broadly as long as the fruits of that effort and knowledge will accrue to the claimant company.
Conclusion
The last two cases should offer some hope to beleaguered claimants and their advisers, that the courts’ approach to the fundamentals of the R&D tax regime has not changed, even if HMRC’s strategy has.
When challenged in a recent Treasury Committee hearing on HMRC’s change of approach to R&D claims over the last couple of years, its Chief Executive argued: “My people are tax inspectors. They are not software engineers or rocket scientists and they meet a vast range of claims in areas in which they do not have expertise.” And yet they routinely refuse claims on the basis that there has been “no appreciable advance in a field of technology”, in which they possess such scant knowledge.
