Many software development companies that make R&D Tax Credit claims have recently received so-called “nudge” letters from HMRC reminding them that the Government’s definition of Research & Development is much stricter than many firms may believe.
Reference is made in the letter to non-qualifying projects which “apply routine software solutions to a new business area which, although bespoke, do not create an advance in the field of software development”. The “nudge” element of the letter urges claimants to amend their tax return if, on reflection, they believe they have filed an incorrect claim.
When I began selling R&D Tax Credit services back in 2005, it was a challenge for software-based claims to be accepted at all and stories of multiple compliance visits by HMRC inspectors were commonplace. The eligibility rules were relaxed around 2007, a move that opened the floodgates to literally thousands of new software R&D claims. Over the next decade, many new “specialist advisor” R&D firms, along with hundreds of accountancy practices, spotted an opportunity to enter the R&D Tax Credit market now that HMRC had seemingly lowered the bar to claiming. No longer did they need to employ expensive computer scientists or software engineers to validate that qualifying R&D was taking place – it was “open season” for any company building so much as a smartphone app to claim R&D Tax Credits.
In more recent years, rocket boosters have been put under the R&D scheme with the entry of new so-called automated platforms. Such companies offer ultra-low success fee rates or even a £999 fixed price. Applicants are required to identify their own R&D projects, which they have to “self-certify” are qualifying R&D, and then write their own technical report which they upload to an online platform. The absence of expert third-party qualification by a sector-specific technologist means that there is limited validation that what is being submitted is actually R&D as HMRC defines it.
A quick scan down the LinkedIn profiles of some of these automated R&D advisory firms reveals that they are primarily staffed by graduate telemarketers whose first job would once have been cold-calling in the Recruitment or PPI claims industries. Technologists are seemingly in short supply.
Understandably, the automated R&D claim providers have marketed heavily to the software sector as this was seen as the easy, low-hanging fruit with very little risk of HMRC queries. However, this focus on software claims could turn out to be their Achilles heel as HMRC increasingly sees the software sector as overclaiming – the new emphasis given to project boundaries in 2018 was an early warning sign of this impending shift.
Could nudge letters herald a new era of compliance for software-based R&D Tax Credit claims? I would argue that a robust technical report, clearly defining the technical advance and technical uncertainties to be resolved is now more important than ever in this new environment. By definition, automated claim services cannot provide the key element of expert technical consultancy that ensures a robust and compliant R&D claim. Putting it bluntly, the danger is one where companies might unwittingly put forward non-qualifying costs which results in an overclaim, which is exactly what HMRC is alluding to in the nudge letters. Once a company is entangled in an HMRC enquiry it would be nigh on impossible for an automated service to be able to help defend a claim that they have only had a minimal involvement in completing.
I certainly don’t believe that now is the time to be putting an R&D claim in the hands of an automated service as this would leave companies high-and-dry in the event of an HMRC enquiry.
My recommendation would be to seek out the services of a reputable R&D specialist that employs experts in the field of computer science and software development. This will enable a claim to be correctly validated as qualifying R&D, as well as giving full protection should HMRC wish to enquire further into the claim.
Are the days of the Automated R&D claim numbered? Certainly, if HMRC begins to enquire into many more software claims then it is difficult to see how they could effectively handle such an escalation. With virtually all R&D firms now touting highly questionable “100% success rates”, my instinct is that things could be about to get much more tricky for those without in-house technical expertise in software development.
In simple terms, it could even destroy an entire business model that is predicated on automating something that is essentially too complex to automate.
Rufus Meakin (Strategic Partnership Sales Associate)
Rufus is a long-standing R&D Tax Credits business development expert and a passionate believer in raising standards across the UK R&D claims industry.
