Guest article written by Linda Eziquiel, Regional Director at RandDTax
My client was established in the mid 1990’s and has become a recognised specialist in force measurement in the test and measurement industry. It is a distributor and also designs and builds bespoke solutions using its R&D capabilities in interface load cell and sensor technology.
It made its first ever R&D claim in the spring of 2022, covering two accounting years up to the end of September 2021. Its total R&D expenditure for the claim was c£54,300 which resulted in a corporation tax reduction of c£5,000 and a tax credit cash payment of c£6,300.
One of its R&D projects was to develop a unique prototype vibration sensor device small enough to fit on a moving luggage conveyor belt within airports. The idea was to monitor and provide invaluable live data to the maintenance engineers allowing them to pick up on and pre-emptively service any worn components.
No such sensor existed so this would clearly be a big improvement on the default position of trouble shooting once a belt has broken down, with all the inevitable service disruption and misery this causes.
It was anticipated that the project would be commissioned by Siemens, the holder of the maintenance contract for Heathrow’s baggage conveyors, however the impact of Covid on air travel led to Siemens pulling out before the R&D had begun.
Like all companies, our client had to be resourceful to get thorough Covid. It had already hired a talented student apprentice engineer for a year, so it decided to focus on R&D and went ahead with the conveyor sensor project and three other R&D projects, despite there being no commission available.
The sensor device and communications system it prototyped was subsequently sold to Siemens where it proved a huge success. A deluge of requests for the system to be adapted for luggage conveyors around the world including Paris, Dallas and Dubai followed.
A second project also sought an advance in conveyor technology by creating smart pins to replace standard bolts and pins at various points in the system. Another project sought to improve on existing sensor technology with live communications in an equine rein tension measuring system and a fourth project aimed to design and build a portable, small scale automated 10N deadweight weighing machine. Nothing similar existed.
Payments from HMRC were received in August and September 2022, although there is still around £2,000 outstanding which the company has decided to leave pending until the outcome of the HMRC compliance check.
HMRC notification of a compliance check enquiry was received at the end of January 2023. It asked for a standard set of information, including much that had already been submitted with the original claim. HMRC deemed the company’s response to be insufficient and a second letter was received at the end of March 2023 requesting much of the same information and a long list of additional details.
It seemed to us that whoever compiled the letter had ‘jumbled’ it together by taking extracts from other letters. There was so much repetition that it was impossible to respond point by point to each paragraph and some of the thinking behind the questions seemed to be based on concepts that are outside of the R&D Guidelines for what qualifies.
Nevertheless we worked together to provide a detailed response by the deadline of 24th April 2023, but to no avail. A third HMRC letter was received four months later at the end of August stating that: “Based on the information provided thus far, in this particular case the R&D claim should be rejected in its entirety.”
Our client was so disturbed and surprised by this rejection that the Managing Director immediately sent a letter to his local MP explaining what had happened and expressing dissatisfaction including that:
“To add insult to injury, in addition to not receiving any support for the R&D we did, it appears that we will now be fined for submitting an inaccurate or fraudulent claim. If the process so far was not deterrent enough, the result certainly is. I do not trust HMRC or the process of the R&D tax claim and we will not be making any further claims for relief if this is the way SMEs are treated.”
The HMRC letter goes into some detail as to why each project does not qualify. The alarming part for us is that the detail displays at best a lack of understanding of the Government Guidelines on what qualifies as R&D and at worst a deliberate misapplication of the Guidelines.
The same findings and conclusions are common on each project. It take some knowledge of the R&D Guidelines to understand where HMRC’s judgements are awry. However a fundamental point is that a company has to demonstrate that they faced ‘scientific or technological uncertainties’ over how to achieve ‘an advance or appreciable improvement in the scientific or technological capability’ of whatever they are developing.
HMRC wrote that: “Existing science and technology has been used in this project … therefore, this is not a new process or an advance and is in fact using existing science and technology.”
The Guidelines make it very clear, including by providing illustrative examples, that the definition of R&D includes not only entirely new discoveries or new technology inventions but also adaptations and innovations in the application of existing science and technology such as to develop a new product or process.
HMRC wrote that: “It would be regarded as technologically feasible for a competent professional to be able to implement the desired design and functions with existing technology or components” (therefore there was no R&D).
The Guidelines say that R&D can still take place where existing technology is used. For example it states that ‘in the creation of electronic devices, the characteristics of individual components or chips are fixed, but there can still be uncertainty about the best way to combine those components to achieve an overall effect’ (as was the case with the conveyor device).
HMRC wrote that: “There is nothing to suggest in the R&D report that anything has been fundamentally changed for the purpose of an R&D advance in science and technology.”
The Guidelines do not anywhere refer to needing to make a ‘fundamental change’ for a project to qualify, or anywhere define this term (terms that have special meaning within the Guidelines are defined).
On the contrary the Guidelines go to some length to highlight that R&D includes the practical application of science and technology: ‘work on combining standard technologies, devices, and/or processes can involve scientific or technological uncertainty even if the principles for their integration are well known’ and ‘an advance in science or technology may have tangible consequences (such as a new or more efficient cleaning product, or a process which generates less waste) or more intangible outcomes (new knowledge or cost improvements, for example)’.
HMRC wrote that: “The project uses, as a basis, commonly available small precision sensing components and systems. Therefore because of this it can reasonably be assumed that a competent professional can reasonably regard the function as trivial.”
It is very hard indeed to see how the use of commonly available small precision sensing components and systems “can reasonably be assumed” to negate R&D and render the function as “trivial”, given such sensors and systems are used in many innovative devices, processes and systems, including for space exploration and in pioneering medical equipment.
Another fundamental point in the Guidelines is that the assessment of whether R&D has taken place should be undertaken by the claimant company’s ‘competent professional’ – in other words the lead scientists, engineers or technology developers working on the project.
In its own internal manual HMRC makes it clear that it does not seek to set itself up as the ‘competent professional’, yet throughout the rejection letter there are assumptions as to what ‘a competent professional can reasonably regard as trivial’ and what ‘would be regarded as technologically feasible for a competent professional to implement….’
It’s incomprehensible to us that HMRC can make these assumptions when it is not a competent professional and has not consulted one and it shows little regard or respect for the views of the projects’ own competent professionals.
Lastly the technological uncertainties listed by the client have been construed to be commercial or business uncertainties because they relate to whether the product will operate successfully … with regard to delivering business’ specific or customer requirements for achievement of a fully functional product.
This is of course nonsense. All companies are seeking to create a working, reliable, cost effective, successful product/process etc. that meets their business’ or customer requirements. Doing so cannot possibly render the uncertainties (e.g. over what technological design and configurations will result in a successful small scale sensor system) invalid as scientific and/or technological uncertainties.
A robust and detailed response outlining all the above issues was sent to HMRC at the end of August 2023 and to date no reply has been received.
Guest article written by Linda Eziquiel, Regional Director at RandDTax
Linda can be contacted at [email protected]
Content by Rufus Meakin (R&D Tax Credit Insider Newsletter)
Find the full article here
