R&D Tax Credits

R&D Tax Credits HMRC Enquiry into Software Development: Lessons from a Tribunal Case

Steve Livingston

Steve Livingston

— 4 min read
R&D Tax Credits HMRC Enquiry into Software Development: Lessons from a Tribunal Case
Photo by Headway / Unsplash

In the ever-evolving landscape of software development, R&D tax credits can be a crucial lifeline for innovative tech companies. However, navigating increasingly common HMRC enquiries into these claims can be challenging.

A recent tribunal case, Get Onbord Limited (GOL) v HMRC, offers valuable insights for software development firms facing R&D tax credit enquiries.

Understanding the Case

GOL, a tech startup, claimed R&D tax credits for developing an AI-enabled KYC (Know Your Customer) verification and risk profiling system. Initially, HMRC rejected the claim, arguing that GOL's work didn't advance overall knowledge or capability and merely used existing technologies.

However, the tribunal ultimately ruled in GOL's favour, providing crucial guidance for tech companies defending their R&D software claims in the face of HMRC challenge.

Key Takeaways for Software Developers

1. Defining Your Project

The tribunal rejected HMRC's argument that GOL didn't have a defined "project." They emphasised that an evolving process with a clear objective can constitute a project under the BEIS Guidelines. As the judgment states:

"It is clear from [the] description of the project that it was an overall process with a defined objective of developing an AI process for KYC verification and risk-profiling. That objective defined the boundaries of what GOL was doing."
💡
Takeaway: Clearly articulate your project's objectives and boundaries, even if the specifics evolve over time.

2. Demonstrating Technological Uncertainty

For software development to qualify as R&D, it must involve resolving technological uncertainties. The tribunal found that GOL's attempt to develop an AI system for KYC verification, without certainty of success, constituted such uncertainty.

💡
Takeaway: Clearly document the technological challenges you face and why their resolution isn't straightforward.

3. Use of Existing Technologies

Importantly, the tribunal clarified that using existing technologies or open-source materials doesn't automatically disqualify a project from being R&D. The judgment notes:

"We do not consider that, of itself, the use of open source, or other existing, materials is an indication that a particular development is routine or readily discernible from publicly available materials."
💡
Takeaway: Don't shy away from mentioning the use of existing technologies. Instead, focus on how you've combined or built upon these in non-routine ways.

4. The Importance of Evidence

The tribunal emphasized the critical role of concrete evidence in supporting R&D claims. They noted:

"We have not attached any weight to the passages in the documents which contain argument, submission or assertion; it is for the parties to make their submissions on these issues and for us to form a view on them."
💡
Takeaway: Maintain detailed, factual records of your development process, challenges faced, and solutions developed.

5. The Role of the Competent Professional

While not definitively required, having evidence from a "competent professional" strengthens your claim. Interestingly, the tribunal found GOL's witness to be a competent professional despite lacking formal qualifications in software development, based on his experience and knowledge.

💡
Takeaway: Identify team members who can speak authoritatively about your project's technical challenges, even if they don't have traditional credentials.

Checklist for Software Development Companies Preparing for R&D Tax Credit Enquiries

To help you prepare for potential HMRC enquiries into your R&D tax credit claims, we've compiled this checklist:

Project Definition:

  • Clearly document your project's objectives
  • Outline the project's scope and boundaries
  • Explain how the project evolves over time, if applicable

Technological Uncertainty:

  • Identify and document specific technological challenges
  • Explain why these challenges couldn't be easily resolved using publicly available information
  • Document your approach to overcoming these challenges

Use of Existing Technologies:

  • List any existing or open-source technologies used in your project
  • Explain how you've combined or built upon these technologies in innovative ways
  • Highlight any modifications or adaptations made to existing technologies

Evidence Collection:

  • Maintain detailed project logs and development diaries
  • Keep records of failed approaches and iterations
  • Document team discussions about technical challenges and proposed solutions
  • Preserve relevant email threads or meeting minutes discussing technical issues

Competent Professional:

  • Identify team members with deep technical knowledge of the project
  • Document their relevant experience and expertise
  • Prepare them to articulate the project's technical challenges and innovations

Advancement in the Field:

  • Research and document the current state of technology in your field
  • Explain how your project goes beyond existing solutions
  • If possible, gather third-party validation of your innovation (e.g., industry recognition, patents)

Comprehensive Technical Document:

  • Create a detailed technical document that outlines all aspects of your R&D project
  • Include diagrams, flowcharts, or pseudocode where appropriate
  • Ensure the document is understandable to a technical audience outside your immediate team

By following this checklist and learning from the GOL v HMRC case, software development companies can strengthen their R&D tax credit claims and be better prepared for potential HMRC enquiries. Remember, the key is to demonstrate that your work goes beyond routine development and represents a genuine attempt to resolve technological uncertainties.

If you need help, just reach out.

Read more