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Building robust R&D claims: what the latest HMRC tribunal ruling means for your claim

Your R&D tax credits claim is important to your business. The third successful HMRC tribunal case ruling in recent times shows you should review your qualifying activities to avoid enquiry. Read our analysis of the recent Hadee case and its impact on your claim.

Last updated: 8 December 2020

Although this recent tribunal case focuses on an engineering business the ruling affects anyone preparing a claim that includes similar activities. The two main areas covered in the judgement were: how project eligibility was assessed and whether accurate record keeping was in place. Visit our page for more details on R&D tax credits advice.

Background to the judgement

Hadee Engineering Co Ltd (Hadee) is involved with fabrication, welding, machining and design services associated with industries such as rail, power generation and waterways. Projects covered in the claim related to client work to create bespoke, one-off pieces of equipment.

Why is the judgement important to you?

We have summarised the 5 essential conclusions to the judgement to make it easier for you to ascertain whether any of these issues could be applicable to your claim.

Trialling technology or responding to customer changes isn‘t enough - eligible work must involve systematic design

According to HMRC guidelines, qualifying projects should work towards solving scientific and technological uncertainties in order to reach an advancement in the related field of science and technology. The tribunal ruling states the design process should be systematic and planned. As such if your claim includes ad-hoc work or trial and error, this wouldn’t constitute a systematic approach and therefore isn’t eligible for R&D tax credits. 

Be careful of claiming for bespoke items, as this may not be an advance

The use of the word ‘bespoke’ was repeatedly challenged in this case. If your project can’t follow an off-the-shelf blue-print or procedure, this alone doesn’t necessarily mean the bespoke solution is innovative and eligible for tax relief. HMRC needs to see how your knowledge, performance or capability was extended. 

Who should be making the claim when the work is subcontracted to you?

HMRC identified quite a few issues around the work subcontracted to Hadee, especially two notable failures. Firstly, some of the contracts appeared to be subcontracted manufactures to a design specified by the customer, so HMRC questioned whether Hadee actually undertook any R&D in relation to this project. The second issue surrounded the company receiving payment for all of the work undertaken. HMRC stated any costs should have been claimed under the large company scheme (as the R&D was subcontracted to Hadee). A review of invoices also indicated that design work had been contracted to Hadee by a third party. 

Therefore if you claim for work undertaken on behalf of another company, you should be clear about the eligibility reason. If you feel the work is eligible, then ensure the claim is submitted under the right scheme. Visit HMRC’s website for guidelines on R&D tax credits to small and medium-sized companies. Alternatively if you’re a large company, HMRC guidelines are also available on the tax scheme on their website.

Has a competent professional reviewed the qualifying projects?

HMRC challenged the suitability of the competent professional chosen by Hadee to assess the eligibility of the projects. Hadee subcontracted a significant amount of the work and therefore HMRC argued that the subcontractor was the competent professional to give evidence for the project. This comes in combination with the fact that some of the evidence had inconsistencies in project activities and costings that the CEO couldn’t answer for. The recent AHK recruitment tribunal ruling also picked up on the same point, about whether the competent professional had the relevant experience to make the assessments. 

When making your claim, it’s important to make it clear who is assessing the project eligibility and ensure they have the right experience and knowledge to make these assessments. For example, would the CEO of a food processing plant have sufficient knowledge to make the eligibility assessments for a major IT project?

Are you able to link qualifying costs to the eligible project?

A major stumbling block for Hadee in making a claim was the lack of records to link subcontractor costs or raw material expenditure to the eligible projects. HMRC won’t accept unclear or contradictory invoices, so don’t ignore how you include those in the claim. We’ve discussed in a previous article why accurate record keeping is critical to a successful R&D claim.

Review your claim – the responsibility lies with you

This is the third successful HMRC tribunal case in the last year so we expect to see more enquiries in relation to R&D claims over the coming years. If any of the tribunal findings resonate with your claim, then now is the time to review it. Don’t forget, the claim is the responsibility of your organisation.

Speak to an expert

If you feel uncertain about what can or should be in your claim, ensure you ask an experienced advisor for help. If you need help interpreting the eligibility criteria to ensure you’re prepared should HMRC enquire, then our team of trusted R&D specialists can offer a free review of your current claim. Get in touch via the below form.

 

About the author

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk
LinkedIn

Last updated: 8 December 2020

Although this recent tribunal case focuses on an engineering business the ruling affects anyone preparing a claim that includes similar activities. The two main areas covered in the judgement were: how project eligibility was assessed and whether accurate record keeping was in place. Visit our page for more details on R&D tax credits advice.

Background to the judgement

Hadee Engineering Co Ltd (Hadee) is involved with fabrication, welding, machining and design services associated with industries such as rail, power generation and waterways. Projects covered in the claim related to client work to create bespoke, one-off pieces of equipment.

Why is the judgement important to you?

We have summarised the 5 essential conclusions to the judgement to make it easier for you to ascertain whether any of these issues could be applicable to your claim.

Trialling technology or responding to customer changes isn‘t enough - eligible work must involve systematic design

According to HMRC guidelines, qualifying projects should work towards solving scientific and technological uncertainties in order to reach an advancement in the related field of science and technology. The tribunal ruling states the design process should be systematic and planned. As such if your claim includes ad-hoc work or trial and error, this wouldn’t constitute a systematic approach and therefore isn’t eligible for R&D tax credits. 

Be careful of claiming for bespoke items, as this may not be an advance

The use of the word ‘bespoke’ was repeatedly challenged in this case. If your project can’t follow an off-the-shelf blue-print or procedure, this alone doesn’t necessarily mean the bespoke solution is innovative and eligible for tax relief. HMRC needs to see how your knowledge, performance or capability was extended. 

Who should be making the claim when the work is subcontracted to you?

HMRC identified quite a few issues around the work subcontracted to Hadee, especially two notable failures. Firstly, some of the contracts appeared to be subcontracted manufactures to a design specified by the customer, so HMRC questioned whether Hadee actually undertook any R&D in relation to this project. The second issue surrounded the company receiving payment for all of the work undertaken. HMRC stated any costs should have been claimed under the large company scheme (as the R&D was subcontracted to Hadee). A review of invoices also indicated that design work had been contracted to Hadee by a third party. 

Therefore if you claim for work undertaken on behalf of another company, you should be clear about the eligibility reason. If you feel the work is eligible, then ensure the claim is submitted under the right scheme. Visit HMRC’s website for guidelines on R&D tax credits to small and medium-sized companies. Alternatively if you’re a large company, HMRC guidelines are also available on the tax scheme on their website.

Has a competent professional reviewed the qualifying projects?

HMRC challenged the suitability of the competent professional chosen by Hadee to assess the eligibility of the projects. Hadee subcontracted a significant amount of the work and therefore HMRC argued that the subcontractor was the competent professional to give evidence for the project. This comes in combination with the fact that some of the evidence had inconsistencies in project activities and costings that the CEO couldn’t answer for. The recent AHK recruitment tribunal ruling also picked up on the same point, about whether the competent professional had the relevant experience to make the assessments. 

When making your claim, it’s important to make it clear who is assessing the project eligibility and ensure they have the right experience and knowledge to make these assessments. For example, would the CEO of a food processing plant have sufficient knowledge to make the eligibility assessments for a major IT project?

Are you able to link qualifying costs to the eligible project?

A major stumbling block for Hadee in making a claim was the lack of records to link subcontractor costs or raw material expenditure to the eligible projects. HMRC won’t accept unclear or contradictory invoices, so don’t ignore how you include those in the claim. We’ve discussed in a previous article why accurate record keeping is critical to a successful R&D claim.

Review your claim – the responsibility lies with you

This is the third successful HMRC tribunal case in the last year so we expect to see more enquiries in relation to R&D claims over the coming years. If any of the tribunal findings resonate with your claim, then now is the time to review it. Don’t forget, the claim is the responsibility of your organisation.

Speak to an expert

If you feel uncertain about what can or should be in your claim, ensure you ask an experienced advisor for help. If you need help interpreting the eligibility criteria to ensure you’re prepared should HMRC enquire, then our team of trusted R&D specialists can offer a free review of your current claim. Get in touch via the below form.

 

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R&D tax credits

R&D tax credits

We understand that R&D Tax credits are important to your business and you cannot afford to have delays in the repayment due to queries from HMRC. That is why we feel you need to engage an advisor you can trust. Our dedicated R&D team has the depth of experience to fully support your business with your claim preparation.

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