“Generous tax reliefs are available for expenditure relating to research and development (“R&D”). An additional deduction from profits is available over and above the amount of the actual expenditure. If this gives rise to a loss, a cash payment can be claimed from HMRC.”*
What is an R&D claim?
According to HMRC, the work that qualifies for R&D tax relief must be part of a specific project to make an advance in science or technology. A claim cannot be made if the advance is in:
- the arts
- humanities
- social sciences, including economics
The project must relate to a company’s trade, either an existing one or one that is intended to begin based on the results of the R&D. To make a claim, the company needs to be able to explain how a project:
- looked for an advance in the field
- had to overcome scientific or technological uncertainty
- or tried to overcome scientific or technological uncertainty
- could not be easily worked out by a professional in the field
The project may research or develop a new process, product or service or improve on an existing one.
What sort of companies claim for R&D?
All companies, regardless of their industry, can claim R&D tax credits as long as they are carrying out activity that amounts to research and development under HMRC’s guidelines (above). For example, companies involved in AI, hospitality, defence, financial services, farming and food businesses can claim for expenditure incurred on advancing overall knowledge or capability in a field of science or technology (but not a company’s own state of knowledge or capability alone).
This includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not readily deducible.
What is an R&D tax claim conflict?
An R&D tax claim conflict arises where there is an R&D tax claim dispute between the company claiming the relief and HMRC. HMRC may deny the claim, and if they do, the taxpayer will need to challenge HMRC in the tax tribunal if HMRC does not back down.
What are the common reasons for R&D tax claim conflicts?
Typically, the conflict will arise when HMRC rejects an R&D claim on the basis that a company’s project did not advance overall knowledge or capability and, therefore, did not amount to research and development, which is a prerequisite for making a claim. A good example of this is the decision of the tax tribunal in Get Onbord Ltd (in liquidation) v Revenue and Customs Commissioners [2024] UKFTT 617 (TC) , in which according to the tax tribunal, “The Company, Get Onbord Limited, sought to develop a novel, automated artificial intelligence (AI) analysis process for ‘know your client’ (KYC) verification and risk profiling. The main objective of this project was to develop AI-enabled holistic analysis of a new counterparty during a financial services customer onboarding process that could achieve a superior outcome to human analysis and meet all regulatory and legislative requirements.”
In refusing the R&D claim, HMRC’s overall conclusion was that:
“Where I stand currently is that the product produced by Get Onboard Ltd is impressive, but it does not meet para 6 of the guidelines based on the information I have. I believe the product produced has used existing processes and technologies that were readily deducible to produce a new innovative product.”
Ultimately though, the taxpayer won and HMRC lost mainly because HMRC were unable to deploy expert evidence to contradict the taxpayer’s expert evidence.
How can I prevent R&D tax claim conflicts?
R&D tax claim conflicts can be avoided by following what the tax tribunal said in the Get Onbord Ltd (in liquidation) v Revenue and Customs Commissioners [2024] UKFTT 617 (TC) decision at [99]:
“Before concluding, we would like to add a few words about the process. It will be readily apparent that this case has turned on the question of the scientific/technological quality of GOL’s project, putting the point very (possibly too) simply “Was it a routine development or a real, meaningful scientific/technological advance?” We consider that these proceedings would have been much more straightforward (and possibly could have been avoided) if, at an early stage, both parties had “put their scientific cards face up on the table”. Ideally, GOL would have produced a single document in which it marshalled all its scientific/technological evidence, including evidence from a competent professional (which is clearly highly desirable, whether or not it is strictly necessary), and HMRC would then have replied to that document with details of its own scientific analysis and evidence. It is not for us to tell other people how to run their cases, but our experience in this case would lead us to suggest this as an approach which might usefully be considered where similar issues arise.”
What should I do if my company’s R&D tax claim is challenged?
First, you should try to reason with HMRC and provide them, ideally in a single document, with all the scientific/technological evidence, including evidence from a competent professional (which is clearly highly desirable, whether or not it is strictly necessary). If, despite this, HMRC still won’t agree to the claim, then you should instruct a tax barrister with relevant experience in challenging HMRC in appeals to the tax tribunal and ask them to advise you on the merits of taking an appeal to the tax tribunal over the claim.
What is the process for appealing an R&D tax claim decision?
The process is basically the same whether you are dealing with for example, an R&D tax claim for a food business or a farming R&D tax claim. The taxpayer company should submit a notice of appeal to HMRC within 30 days of receiving the closure notice or other decision document from HMRC refusing the claim. HMRC will then issue their current view of the matter and ask whether the taxpayer would like an internal review of the claim. Assuming that an internal review is requested and ultimately supports the original decision to refuse the claim, the taxpayer will then have 30 days to notify its appeal to the tax tribunal.
On receiving the taxpayer’s appeal, the tax tribunal will direct HMRC to issue a detailed statement of case explaining in detail why the R&D claim has been denied and HMRC will normally be given 60 days in which to do this. On the issue of the statement of case, the tax tribunal will then issue detailed directions for the conduct of the appeal leading up to a hearing and these directions will provide for matters such as witness statement and the lists of the parties’ documents and the preparation of the hearing bundle.
The hearing before the tax tribunal is very important because it is at this stage that the relevant facts are established by the tribunal and the parties’ evidence is evaluated. These findings will rarely be overturned by an appeal tribunal or a court should there be an appeal of the tax tribunal’s decision. It is, therefore, worth investing in the services of an experienced tax barrister to present the appeal at the tax tribunal in order to try to establish a finding of the facts and an evaluation of them by the tribunal which is as favourable to the taxpayer as possible.
How long does it take to resolve an R&D tax claim conflict?
The length of time taken to resolve R&D tax claim disputes varies enormously and depends in such factors as the technical complexity of the science and technology underlying the claim, the extent of the correspondence between HMRC and the taxpayer and its advisers, whether the parties first opt for alternative dispute resolution or “ADR” in order to try to settle the claim without going to tribunal and, if the matter proceeds to the tax tribunal, the time taken to comply with the tax tribunal’s directions and for the tribunal to list the appeal for a hearing.
As an example, in the appeal decision mentioned above, the company issued a detailed report describing the R&D to HMRC on 4 August 2021, with further correspondence occurring back and forth with HMRC until 14 October 2022, when HMRC issued their review conclusion letter refusing the R&D tax claim. The appeal was notified to the tax tribunal, which heard the appeal on 3 January 2024, and the tax tribunal issued its decision upholding the taxpayer’s appeal on 9 July 2024, nearly three years after the detailed R&D report was issued to HMRC. Tax appeals in R&D claims can, therefore, take as long as any other type of tax appeals.
Conclusion
The importance of a successful outcome to any R&D tax claim means that you would be wise to hire an experienced tax barrister to assist you and your tax accountant whenever there is the prospect of the R&D claim becoming contentious so that the correct groundwork and preparation put in at the beginning to maximise the chances of success later on if the matter has to proceed to an appeal hearing in the tax tribunal, for assistance with R&D tax claims.
If you need support regarding R&D Tax claim conflicts, please contact Patrick here or read more about the service he offers here.
*Tills Plus Ltd v HMRC [2024] UKFTT 614 (TC) at 1.
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