AHK Recruitment Ltd – a recent refusal by the Tax Tribunal of a software R&D claim .
Whatever you might think, or be told, about the availability of R&D tax relief, it is ultimately a question of law as to whether expenditure qualifies. In interpreting the law, it is the decisions of the Courts that determine the correct approach
For that reason it is worth reviewing the recent decision of the Tax Tribunal in the AHK recruitment Ltd case (Full report). The case provides a cautionary warning against relying on inadequate agents to prepare and defend an R&D claim. This was a software claim and these claims need specialist technology skills that few advisers can offer.
The Tribunal found in this appeal that the advisors had failed to properly identify, or substantiate the nature of the technological advance sought, and the technological uncertainties that had to be overcome. The original claim had focused on aspects of the study of human behaviour. This was bound to attract HMRC concern as such work is unlikely to qualify. Subsequently it was claimed that the human behaviour references were simply setting a context for software work to take place, and, at a later stage still, it was suggested that the qualifying work was early stage development work on machine learning through neural networks. This change of description did nothing to enhance confidence in the quality of the claim preparation, and indeed, during the hearing, a representative of the R&D agent went so far as to suggest that his predecessors had failed to understand the relevant technology.
As well as the R&D having been poorly identified and described, the Tribunal also found that the claim had not been based on a reliable identification of the relevant costs relating to the R&D, and that overall the claim had relied on assertion instead of analysis and evidence.
In consequence, the appeal against HMRC’s refusal of the claim was never going to succeed, even if there had been qualifying R&D – which the Tribunal left undetermined
In its verdict, the Tribunal laid great stress on the need for a competent professional in the relevant technology field to make the R&D judgements as to what was the qualifying R&D. There was no evidence in this case that this had been done, and no competent professional gave evidence in support of the claim. (In contrast, at MSC our approach is to thoroughly interview the competent professionals as part of our preparation work, and to back them up with experienced software professionals who are trained in the detail of the qualifying rules.)
As this appeal foundered on the quality of the claim, and the lack of supporting evidence, there is still no practical example available as to how the courts would define the boundaries of genuine software R&D. But, given the difficulties and costs of litigation, most claim disputes (if they occur at all) will inevitably be resolved by discussion and negotiation, so this may not change for some time.
In the meantime, you are best served by advisers with both an understanding of the statutory rules determining qualifying R&D, and a genuine technological expertise. A well-prepared claim, in the format expected by HMRC, reduces the risk of an enquiry at outset, which is important. It is worth noting that the HMRC enquiry in this case started in March 2016, and proceeded until October 2018, while the Tribunal process did not reach its conclusion until May 2020. That is a very long time frame for what should ideally have been be a straight forward process – particularly when the clam was ultimately unsuccessful!
However even the best prepared claims will sometimes be subject to enquiry. These are difficult technology areas for a layman, and so HMRC have also started involving their IT colleagues in examining such claims. While these IT colleagues may have a better grasp of the technological aspects, this is often accompanied by an incomplete understanding of the definition of R&D for tax purposes. For that reason it is particularly sensible to use an advisor that can resolve technology queries as well as understand and explain the statutory framework.
If you would like to talk to an expert about your R&D Tax Credit claim call us on 0114 230 8401
