R&D Tax Credits for Successful Software Claims: Lessons from Recent UK Tax Tribunal Cases

There have been two recent Software Development tribunal cases that resulted in two very different outcomes: one decided in favour of the software company (Get Onbord Limited) and the other in favour of HMRC (Tills Plus Limited).

This provides a useful opportunity to compare the two cases to glean valuable insights into what makes a successful R&D tax credit claim for software projects.

Tale of Two Claims: Get Onbord's Success vs. Tills Plus's Failure

Both Get Onbord Limited (GOL) and Tills Plus Limited claimed SME R&D tax credit relief for software development projects. However, the outcomes were starkly different. GOL's appeal was allowed, while Tills Plus's was dismissed.

Let's examine why...?

Get Onbord Limited: A Winning Claim

GOL's project aimed to develop "a novel, automated artificial intelligence (AI) analysis process for 'know your client' (KYC) verification and risk profiling." The tribunal found that GOL successfully demonstrated:

1. A clear project with a defined aim
2. Technology not already publicly available or readily deducible
3. Development beyond routine copying or adaptation
4. Resolution of technological uncertainties not easily solved by competent professionals

The tribunal noted:

"We are satisfied, on the balance of probabilities, that GOL had a project with a defined aim; the technology GOL sought to develop and incorporate in the project was not already publicly available or readily deducible; the technology it sought to develop to achieve the project's aims amounted to more than 'routine' copying or adaptation of an existing product or process; and the project required the resolution of technological uncertainties which a competent professional working in the field could not have readily resolved."

Tills Plus Limited: A Failed Claim

In contrast, Tills Plus's claim for developing a "virtual hospitality manager" was rejected. The tribunal found that Tills Plus failed to demonstrate:

1. Consistent documentation of the R&D project
2. Clear technological advancements beyond existing capabilities
3. Resolution of scientific or technological uncertainties

The tribunal's assessment was particularly damning:

"As [the claimant company's founder] accepted in his evidence, the creation of the virtual operational manager simply involved taking existing technology or products and combining them to provide an integrated system. There is no evidence that this would achieve any advance in science or technology by resolving scientific or technological uncertainties."

This quote clearly illustrates why Tills Plus's claim failed - they couldn't demonstrate that their project went beyond combining existing technologies to create a genuine advance in science or technology.

Key Differences: What Led to Success vs. Failure

1. Consistent Project Documentation

GOL provided clear, consistent documentation of their project's objectives and technological challenges. In contrast, Tills Plus provided inconsistent explanations of their project's goals and technological advancements.

1. Evidence of Technological Advancement

GOL demonstrated that their project went beyond existing technologies and involved resolving genuine technological uncertainties. Tills Plus, however, failed to show that their work was more than a combination of existing technologies.

2. Competent Professional Testimony

GOL's director, Mr. Cahill, was recognized as a competent professional who could articulate the technological challenges and advancements. Tills Plus relied on explanations from a non-technical director, which weakened their case.

3. Clear Distinction Between Business and Technological Advances

GOL focused on the technological advancements of their AI system, not just the business problem it solved. Tills Plus seemed to conflate business innovation with technological advancement.

4. Detailed Technical Explanations

GOL provided specific examples of technological challenges they overcame, such as developing algorithms for data normalization. Tills Plus's explanations were more general and focused on business functionality rather than technological innovation.

Lessons for Software Companies: Ensuring Successful R&D Tax Credit Claims

To improve your chances of a successful R&D tax credit claim for software projects, consider the following checklist:

1. Clearly define your R&D project objectives from the start
2. Document the specific scientific or technological uncertainties you're trying to resolve
3. Maintain consistent project documentation throughout the R&D process
4. Clearly differentiate between routine software development and genuine R&D activities
5. Involve competent professionals with relevant technical expertise in defining and documenting your R&D activities
6. Provide detailed technical explanations of the challenges faced and solutions developed
7. Focus on technological advancements, not just business innovations or new functionalities
8. Keep detailed records of all R&D expenditure, including subcontractor payments if applicable
9. Be prepared to explain how your work advances the field beyond current industry capabilities
10. Consider seeking expert advice on R&D tax credits to ensure compliance and strong documentation.

By following these guidelines and learning from the contrasting outcomes of the Get Onbord and Tills Plus cases, software development companies can strengthen their R&D tax credit claims and be better prepared for potential HMRC scrutiny.

Remember, while R&D tax credits can provide significant financial benefits, it's crucial to ensure your claims are robust, well-documented, and focused on genuine technological advancements.

As the Get Onbord case demonstrates, a well-prepared claim with clear evidence of technological uncertainty and advancement can successfully withstand HMRC's challenges.

Reach out for help.