HMRC has found itself at the centre of a number of high-value disputes in recent days over the claiming of R&D tax relief, centring around the question of what qualifies as R&D for tax purposes.
The Treasury lost its case to block software company, Get Onboard, from appealing a rejection of its R&D tax claim – with the First-Tier Tribunal ruling that it met the definition of R&D and its work constituted a new development in the sector.
Conversely, HMRC prevailed in a recent case valued at £665,000, successful in its rejection of software developer Tills Plus’ claim due to a lack of technological innovation.
These developments have raised the question of eligibility for the scheme for accountancy firms and the clients they serve.
Getting the fundamentals right
The issue of software has plagued the R&D tax landscape for a long time, more so now that HMRC has launched its multi-faceted compliance crackdown.
Both of these cases, and many like them, hinged on the question of whether the project in question developed a new product and actively addressed an uncertainty within the sector, or simply adapted an existing piece of technology into something different.
This is crucial for eligibility for R&D tax relief and the definition of R&D itself – but it also presents a challenge regarding subjectivity in R&D tax claims.
The problem of subjectivity
R&D tax claims are assessed by caseworkers within HMRC, looking out for certain criteria and whether these have been fulfilled.
This reason, combined with the fact that even the most novel of projects often build on some level of existing concept or technology, means that it is a subjective decision as to whether a project meets the definition of R&D or not.
This isn’t something which can be removed from the process, but it can be mitigated.
Making claims watertight, with clear evidence of novelty within the technical narrative, is the most effective step you and your clients can make to protect the claim during an enquiry.
Is it old or new?
How, then, should you approach preparing and submitting claims for clients in developing sectors?
Your first step should be to seek advice from the experts. R&D tax is complex and has recently undergone a major shift, something which many full-service firms find difficult to navigate.
You can then look towards preparing the claim, always focusing on that question of addressing an uncertainty.
When submitting the claim, you and your client should be able to answer in the affirmative to three questions:
- Is this product or concept new?
- Does this project address a challenge, need or uncertainty within my sector?
- Is the project demonstrably related to science and technology?
If all of these criteria are met, then the claim itself should be solid. The first question is where you should start, establishing novelty and genuine development, as without it the other considerations aren’t relevant.
If clients in technical or rapidly developing sectors are struggling with R&D tax claims, we can advise you on the best way forward with integrity and transparency.
Contact our advisory team today to get started.
