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Flame Tree Publishing – Identifying competent professionals in R&D Tax claims

By Ryan Sian, Managing Director of randd UK

Author: Tom Mason

The recently published case of Flame Tree Publishing Limited v HMRC [2024] TC09149 has highlighted significant challenges in making Research and Development (R&D) tax claims – both for claimants and agents helping to prepare new claims.

This appeal by a publisher against HM Revenue & Customs’ (HMRC’s) rejection of a claim has highlighted the necessity of involving genuinely competent professionals in the R&D process.

In this case, Flame Tree Publishing’s R&D project aimed to make its digital archive of books available as curated and searchable resources.

However, HMRC rejected an R&D tax claim after an enquiry and statutory review. The First Tier Tribunal (FTT) has now upheld this decision, resulting in an increased Corporation Tax liability of £50,662 for the company.

The key failures of this appeal

The decision of the FTT to reject this appeal was based on two key factors:

Competent professional:

The company asserted that its staff were ‘competent professionals’, as defined within the R&D tax rules, and that its claim met the necessary tests.

However, in its rejection of Flame Tree’s appeal, HMRC said that neither the company director nor the production manager could be classed as such.

When asked by the Tribunal to provide evidence that they met the test, the company was unable to provide evidence that its team were competent professionals in any relevant field.

Although they were experienced in the publishing industry, they lacked the necessary skills to be deemed sufficiently expert in software development and programming.

Ultimately, the Tribunal found they only had “some knowledge” of IT and computing and lacked the detailed, up-to-date expertise in software and programming required to qualify as R&D under the guidelines.

The Tribunal also noted that most of the work was conducted by a third party, yet the claim was made under in-house R&D rules.

Qualifying expenditure:

The second part of the appeal was related to the claim against its R&D tax expenditure. Even if the company had met the first test for the work being conducted by a competent professional, HMRC said that the investment by the company was not based on newly developed technologies.

In particular, HMRC’s case was that the company failed to show any of its activities had met the tests described in paras 22 and 24 of the guidelines.

The company had used ‘Ogg technology’ technology that was new to the company, but it was not deemed novel in the wider context.

As a result, this expenditure did not meet the tests required in the guidelines and, therefore, the FTT upheld HMRC’s argument.

Implications for R&D tax claims

The Flame Tree Publishing case underscores the complexities involved in R&D tax claims and the critical importance of involving competent professionals with relevant, up-to-date technical or scientific knowledge.

Many businesses struggle to accurately define and document their R&D activities, often due to a lack of in-depth understanding of the tax rules and guidelines.

This challenge is often just as real for many advisers, who are reliant on the narratives and details provided by their clients.

Challenges in the R&D tax claim process

This case highlights several important challenges in the R&D tax claims process for claimants and accountants, alike:

  • Defining a competent professional: The existing R&D tax guidelines state that a competent professional must have knowledge beyond an ‘intelligent interest’ in the field. This case highlights how easily company officers can overestimate their qualifications without proper advice.
  • Documentation and evidence: Proper documentation is crucial to all tax claims. Claimants must be able to clearly outline the R&D project’s scope, the technical uncertainties addressed, and how eligible costs are allocated to the R&D activities.
  • Technical expertise: It is not enough to have experience in a related industry. claimants need professionals with specific technical expertise to meet HMRC’s criteria for R&D claims.

Final thoughts

This case serves as a stark reminder of the need for thorough preparation and expertise when making R&D tax claims. Even experienced accountants can face difficulties if they lack a deep understanding of the R&D tax rules.

Ensuring that a genuinely competent professional leads the R&D work and documents the process is essential for a successful claim, as has been demonstrated.

At randd UK, we specialise in helping businesses and accountants navigate the complexities of R&D tax relief claims.

Our team of experts ensures that every claim meets the stringent requirements set by HMRC before any work is undertaken, providing our clients and partners with peace of mind and maximising their potential tax benefits.