When a company submits an R&D tax relief claim to HMRC, it is often reviewed by HMRC’s R&D specialists. These are typically tax-trained inspectors but with experience of R&D claims. Where appropriate, they may bring in a sector specialist or somebody with the relevant technological experience to assist.
Change of approach
In recent years, HMRC has changed its approach to R&D tax relief claims for software development and has hired IT specialists. IT-related claims are often passed to these specialists to review. Many practitioners on the HMRC R&D Consultative Committee, including RSM, have argued that this sets the bar higher for software claimants.
As a result, we are seeing more challenges from HMRC for software R&D claims. In many cases, the challenges relate to the level of technical detail within a claim submission, as HMRC will want to ensure that the claim is valid but appreciates that this can be a complex area.
X Ltd’s R&D claim states the advance in technology its R&D project sought to achieve is to build a video platform that can run videos from multiple sources; technological uncertainty existed as there was no product available in the public domain that could do this and they had experienced issues around system uncertainty (for example, the initial solution for running videos from multiple sources caused the platform to slow down).
HMRC’s specialist IT advisers may challenge whether this is truly an advance, given that platforms such as YouTube already exist. They may also challenge whether this technology is already in the public domain or, in any event, readily deducible. They may also ask for details on any system uncertainty, or how the intended R&D project results in something that exceeds existing providers’ technology.
Just because HMRC has challenged an R&D claim, it does not mean the claim is invalid. But, these enquiries can often be pre-empted or avoided entirely by acknowledging that submissions should be ‘written for a different reader’ – ie a technical peer of the competent professional within the claimant’s business, as opposed to a lay tax inspector with some sector understanding.
HMRC’s IT specialists will likely come from varied backgrounds. A claim by a bank (looking to improve the performance of their IT systems) could be challenged by somebody with experience in, for example, video games development. The specialist may have a good understanding of banking systems and IT generally, but they may not have a full understanding of the specific technology referenced in the claim (or, indeed, the sector), so sufficient information would need to be given to demonstrate why the claim is valid.
The way forward
Companies should seek advice to ensure that R&D claims are presented in such a way that seeks to mitigate against challenges by HMRC. In almost all cases, additional time invested at the outset should result in a smoother claim process – unlocking cash more quickly.