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Zeeshan Khilji looks at recent tribunal cases where HMRC challenged Research & Development tax relief claims, providing a useful reminder to businesses in terms of what to look out for when submitting R&D claims, to avoid an enquiry and entering a tribunal process.
R&D tax relief is by far the most attractive form of corporation tax relief available to UK companies. It is aimed at rewarding UK companies for investing in innovation and is an extremely valuable source of funding for businesses, resulting in a cash benefit either in the form of a reduced corporation tax liability, or a payable tax credit for loss-making companies.
HMRC’s recent increased scrutiny together with a rise in enquiries into R&D claims means that companies must ensure that the R&D claims being submitted are robust and thorough. The latest tribunal hearings have suggested that HMRC are pursuing more disputes which are going to tribunal. We look at three such recent cases below.
Case 1 – Hadee Engineering Co Ltd
Hadee Engineering Co Ltd (Hadee) was involved with welding, fabrication and design services in connection with industries such as rail, waterways and power generation. Projects included in the R&D claim related to work in order to create bespoke and one-off pieces of equipment.
I have summarised key conclusions to the judgement.
Trialling technology or responding to customer changes is not sufficient
HMRC guidelines state that qualifying projects should aim to resolve scientific and technological uncertainties with a view to reaching an advancement in the related field of science and technology. The tribunal ruling stated the design process should be systematic and planned. Therefore, if an R&D claim includes ad-hoc work or trial and error, this will not necessarily constitute a systematic approach and therefore might not be eligible for R&D tax relief.
Bespoke items might not constitute an ‘advance’
Repeated references were made to the use of the word ‘bespoke’ which was challenged in this particular case. HMRC needs to see how the company’s knowledge and capability was extended – simply developing a bespoke solution does not necessarily make it innovative and eligible for R&D relief.
The suitability of the competent professional selected by the company (CEO) to establish the eligibility of the projects was challenged by HMRC. The CEO could not provide justifications for some inconsistencies in respect of project activities and costings.
When submitting an R&D claim, it is important to make it clear who is assessing the project eligibility and ensure they have appropriate knowledge and experience.
Records in relation to qualifying costs for the R&D project
Another issue which Hadee faced in respect of the claim was the lack of records for subcontractor expenses and linking raw material expenditure to the eligible projects. HMRC will generally not accept invoices that are contradictory or unclear and this demonstrates the importance of accurate record keeping.
Case 2 – Grazer Learning Limited
This case relates to Grazer Learning Limited, a small start-up company which developed tools to help tutors and students. The company made a claim for R&D tax relief based on the development of platform that would take into account a learner’s prior experience and specific learning goal in offering learning content.
The claim produced a cash tax credit of c.£26,000, which the company received in June 2018. However, an enquiry was still opened into the claim in September 2019, which demonstrates that HMRC can open enquiries even after a claim has been paid out.
HMRC did not agree that the work undertaken by the company consisted of qualifying R&D. HMRC opened the case against the company as it was not satisfied that the software claim constituted R&D, particularly the way in which the qualifying project was described in terms of functionality and features.
HMRC wanted to understand why the software code which was being developed was considered technically challenging to develop. It was established that “the work carried out was no more than a novel utilisation of the existing technology in this area or an adaptation of that existing technology, which was readily deducible by a competent professional working in the field”.
Case 3 – DNAe Group
This case related to DNAe Group where HMRC challenged another SME claim. The key point which was considered here was if an investor owns more than 25% of the shares, HMRC may consider a business to be a large company and as such, it may not qualify for the more generous SME tax relief.
In this case, the judge tried to determine whether the investment into DNAe Group is speculative in which case the company would be deemed to be an SME. The tribunal ruling runs to 21 pages with a detailed analysis of the investment into the business and it was eventually concluded that DNAe Group was an SME.
If DNAe Group was deemed not an SME, it would have been deemed to be a large company meaning the R&D relief would have been less generous. However, as DNAe Group would have been out of time to submit an amended return, the claim could have been disallowed.
The SME status rules can be complex and we recommend that you seek specialist advice in such circumstances.
R&D tax relief is a key incentive that the government gives to UK businesses and it is important to the economy that this incentive continues to be provided to innovative businesses. However, given HMRC’s increased scrutiny when reviewing claims, it is even more important that specialist tax advice is sought when preparing R&D claims.
At ETC Tax, our R&D experts can help assess your company’s activities to maximise R&D tax relief opportunities in line with the legislation and HMRC guidelines. We can manage your R&D claim from start to finish, allowing you to focus on managing your business. Get in touch today.
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