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R&D claim denied: HMRC and AHK Recruitment Ltd

The first-tier tribunal has recently ruled on a case where HMRC had raised a closure notice to deny an R&D claim. Buzzacott’s R&D Director, Iain Butler, analyses what the ruling means for claims, and reveals how supporting documentation can seriously impact the outcome.

Unlike most other areas of tax, preparing your R&D claim requires a written submission. We see that this aspect of preparing the claim is difficult, and companies can struggle to create the document for HMRC’s consumption. As a result, we see claims with very brief, generic descriptions and others where everything including the kitchen sink has been thrown in. 

With this in mind, we unpick the learnings from AHK Recruitment Ltd’s ruling, and what this could mean for your R&D claim.

HMRC may not tolerate weak technical supporting information any more

AHK Recruitment Ltd submitted a claim in relation to developing an internal IT platform to assist with their recruitment activities. What is clear throughout the ruling is HMRC’s frustration with the documentation as well as the inability of the claimant to clearly articulate why the development project is eligible. 

This is a typical scenario, as claims with twenty pages of text describing the eligible work take an excessive time to review and inspectors struggle to identify the crux of the eligible project. To try and assist in this area, HMRC has been working with advisers over the last 3 years to identify a consistent format for R&D claim supporting documentation. This template has consequently been devised by HMRC to provide the key information required by an inspector. In addition, HMRC have provided detailed guidance to highlight what inspectors need to see in order to agree a claim.

It would appear from the AHK Recruitment Ltd tribunal case that HMRC are now moving on from this guidance and are challenging claims with poor supporting technical information. Therefore, if you are preparing an R&D claim, it is worth understanding more about the impact of the judge’s rule on claims.

What does this mean in relation to your claim?

Here are our 3 key take-aways, outlining the technical description pitfalls for you to avoid.

1. Do not use stock phrases or provide generic documentation

If you submit generic documentation focusing on the aims or the commercial needs of a project, HMRC will struggle to understand why the work represents an advance in science and technology. According to the tribunal judgement, relying on arguments such as “there is nothing like this available in the market” or “existing software could not achieve the aims of the project” could be ignored by HMRC.

Therefore you should expect your professional adviser to dig into the technical work, to help you understand what has been developed and how this was achieved. Every project is different, and it’s only through discussing the work with someone from the technical side of the business that the advance in science and technology can be properly articulated in the claim. Additionally, it’s essential that your competent professional should be comfortable to defend the position set out in the claim report. Our experts, with years of experience, can advise you on how to provide clear technical descriptions that will be relevant to HMRC.

2. Do not claim for achievements in science areas excluded by HMRC

The definition of R&D can appear relatively straightforward in that it covers the fields of science and technology. We find that many businesses are unaware that HMRC have introduced a number of specific exclusions. HMRC’s R&D tax relief Conditions to be Satisfied document states: “work in the arts, humanities and social sciences, including economics, is not science for the purpose of these guidelines.” As the aforementioned judgement points out, if the technical description focuses on these aspects of the project, an inspector will be confused as to why this is a valid claim. If your business is heavily focused on these areas, it’s worth speaking to an adviser as there may be a valid claim to be made, but extra work will be required to differentiate between the eligible and ineligible aspects of the project. 

3. Do not try to automate or simplify technical documentation

We understand that there's no shortcut in preparing technical supporting documentation, so our team is structured to allow us the time to prepare robust documentation. Documents created automatically, or through a brief chat with the technical lead, will only be as good as the information input into the online engine, or discussed in the meeting. You’ll know that all projects are different and the nuances between development activities can be subtle, but these are important to note when preparing a claim.

We believe that preparing technical documentation isn’t an area that can be automated or simplified. But that does not mean your in-house team cannot take on the work if they have time. Therefore, it’s always better to ensure your in-house team are properly trained to prepare the documentation, or that you use a regulated external adviser. If you feel that your claim documentation might not be describing what was developed and why this was an advance, then please get in touch for a free review. 

Conclusion

The AHK Recruitment Ltd tribunal case shows HMRC are serious about ensuring the R&D tax credits scheme is being applied correctly. Our reading of the judgement in this case is that going forward HMRC will be more willing to challenge technical documentation submitted with claims, and will seek to clarify the experience of the competent professionals. Many companies will need to up their game when preparing their R&D claims, otherwise they could start seeing protracted enquiry processes. 

Looking for more information?

If you would like help with your claim, or have questions about scheme, get in touch below through the enquiry form.

About the author

Iain Butler

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

Unlike most other areas of tax, preparing your R&D claim requires a written submission. We see that this aspect of preparing the claim is difficult, and companies can struggle to create the document for HMRC’s consumption. As a result, we see claims with very brief, generic descriptions and others where everything including the kitchen sink has been thrown in. 

With this in mind, we unpick the learnings from AHK Recruitment Ltd’s ruling, and what this could mean for your R&D claim.

HMRC may not tolerate weak technical supporting information any more

AHK Recruitment Ltd submitted a claim in relation to developing an internal IT platform to assist with their recruitment activities. What is clear throughout the ruling is HMRC’s frustration with the documentation as well as the inability of the claimant to clearly articulate why the development project is eligible. 

This is a typical scenario, as claims with twenty pages of text describing the eligible work take an excessive time to review and inspectors struggle to identify the crux of the eligible project. To try and assist in this area, HMRC has been working with advisers over the last 3 years to identify a consistent format for R&D claim supporting documentation. This template has consequently been devised by HMRC to provide the key information required by an inspector. In addition, HMRC have provided detailed guidance to highlight what inspectors need to see in order to agree a claim.

It would appear from the AHK Recruitment Ltd tribunal case that HMRC are now moving on from this guidance and are challenging claims with poor supporting technical information. Therefore, if you are preparing an R&D claim, it is worth understanding more about the impact of the judge’s rule on claims.

What does this mean in relation to your claim?

Here are our 3 key take-aways, outlining the technical description pitfalls for you to avoid.

1. Do not use stock phrases or provide generic documentation

If you submit generic documentation focusing on the aims or the commercial needs of a project, HMRC will struggle to understand why the work represents an advance in science and technology. According to the tribunal judgement, relying on arguments such as “there is nothing like this available in the market” or “existing software could not achieve the aims of the project” could be ignored by HMRC.

Therefore you should expect your professional adviser to dig into the technical work, to help you understand what has been developed and how this was achieved. Every project is different, and it’s only through discussing the work with someone from the technical side of the business that the advance in science and technology can be properly articulated in the claim. Additionally, it’s essential that your competent professional should be comfortable to defend the position set out in the claim report. Our experts, with years of experience, can advise you on how to provide clear technical descriptions that will be relevant to HMRC.

2. Do not claim for achievements in science areas excluded by HMRC

The definition of R&D can appear relatively straightforward in that it covers the fields of science and technology. We find that many businesses are unaware that HMRC have introduced a number of specific exclusions. HMRC’s R&D tax relief Conditions to be Satisfied document states: “work in the arts, humanities and social sciences, including economics, is not science for the purpose of these guidelines.” As the aforementioned judgement points out, if the technical description focuses on these aspects of the project, an inspector will be confused as to why this is a valid claim. If your business is heavily focused on these areas, it’s worth speaking to an adviser as there may be a valid claim to be made, but extra work will be required to differentiate between the eligible and ineligible aspects of the project. 

3. Do not try to automate or simplify technical documentation

We understand that there's no shortcut in preparing technical supporting documentation, so our team is structured to allow us the time to prepare robust documentation. Documents created automatically, or through a brief chat with the technical lead, will only be as good as the information input into the online engine, or discussed in the meeting. You’ll know that all projects are different and the nuances between development activities can be subtle, but these are important to note when preparing a claim.

We believe that preparing technical documentation isn’t an area that can be automated or simplified. But that does not mean your in-house team cannot take on the work if they have time. Therefore, it’s always better to ensure your in-house team are properly trained to prepare the documentation, or that you use a regulated external adviser. If you feel that your claim documentation might not be describing what was developed and why this was an advance, then please get in touch for a free review. 

Conclusion

The AHK Recruitment Ltd tribunal case shows HMRC are serious about ensuring the R&D tax credits scheme is being applied correctly. Our reading of the judgement in this case is that going forward HMRC will be more willing to challenge technical documentation submitted with claims, and will seek to clarify the experience of the competent professionals. Many companies will need to up their game when preparing their R&D claims, otherwise they could start seeing protracted enquiry processes. 

Looking for more information?

If you would like help with your claim, or have questions about scheme, get in touch below through the enquiry form.

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