July 2024 saw a landmark judgement from a first-tier tax tribunal in which HMRC lost a case against a software company that had previously claimed R&D tax credits. Against a backdrop of increasing compliance checks by HMRC against R&D tax relief claims, this ruling could have significant implications for all R&D tax credit claimants.

The tribunal, brought by Get Onbord Ltd, examined an R&D claim for the development of an AI (Artificial Intelligence) system to perform Know Your Customer (KYC) and anti-money laundering (AML) checks. The company asserted this was a unique product that no one else had at the time and therefore the development should be considered an advance in science and technology. The company also highlighted other aspects of the software that were challenging and therefore difficult to develop, so they were comfortable that the project qualified for R&D relief – and they were supported by Myriad Associates, an R&D tax credits advisor.

However, HMRC felt that this was not a valid claim. They challenged Get Onbord on a number of fronts, including the experience and qualification of the “competent professional” in charge of preparing the R&D claim, and whether or not the development even counted as R&D: They argued that the development was taking known technology and deploying it into a platform using known methods and techniques.

Currently, this is HMRC’s standard approach to software compliance checks, and many businesses feel their claims are being unfairly rejected. Consequently, this case serves as a useful test of HMRC’s approach and how it would be viewed by a judge.

Who should be involved in your claim? The 'competent professional'

An R&D claim must be assessed by a competent professional who has sufficient experience and knowledge in the field of science or technology to judge whether the work qualifies as an advance in knowledge. In this case, the judge’s opinion was markedly different from that of HMRC. HMRC tried to undermine the experience of the competent professional, relying on the fact that he had no software-related degree, and ignoring his decades of experience in the field. Conversely, the judge described the CEO of Get Onbord as “an impressive” witness, who was clearly very experienced in his field, spending more than 20 years building models for investment banks.

This approach should give comfort to many claimants as HMRC’s narrow education-based approach was preventing highly experienced staff from being put forward as the competent professional.

This case clearly challenges the position taken by HMRC in many claims which dismiss someone working in the field as purely having knowledge by experience and little more than a passing interest in the subject. We have challenged this position on several occasions and HMRC has dropped their arguments or not pursued this point any further. This case also clearly points to the need to get an HMRC inspector on a call with your competent professional to allow them to show their depth of knowledge – a tactic that has proved successful on several occasions for our clients.

What projects can be claimed?

To date, HMRC has argued that if the project uses existing technology, then unless you are fundamentally advancing that technology, you cannot claim. This sets a remarkably high bar – and is not realistic of how competent professionals work in this industry: Most software will build upon code and techniques developed by others rather than starting absolutely from scratch. HMRC’s position had made many software developers question whether its intention was to exclude software development work from the scheme.

The judge was convinced that in the Get Onbord case, an innovative application had been created as the work involved many thousands of lines of code, and he was comfortable that much of the coding reused functions or block of code developed by someone else. Therefore, this tribunal provides a counterbalance to HMRC’s approach and a validation that software developments are eligible, providing a significant clarification on the interpretation of the DTSI Guidelines and how to apply them in practice.

This is a major challenge to HMRC’s approach to reviewing software claims and allows companies to reconsider how they assess eligibility in their projects. When preparing a claim, if the functionality required by the company did not exist, this is indicative of an advance. The challenge we help clients with is the next step – articulating why there is a technology gap can be sufficient to call something an advance in the field of software engineering.

How should you present your claim?

The judge made an interesting point at the end of his decision, commenting that the enquiry process could have been resolved much quicker if both parties had put their technical “cards on the table” before going to tribunal. This case shows that getting your technical case sorted out and down on paper is critical to success.

We have been involved in situations where HMRC has presented minimal information to companies stuck in a compliance check to back up their statements that certain technologies already exist. This judgement clearly allows claimants to push back and ask for HMRC’s full research.

Going forward, claims will have to be presented very differently, with a deeper emphasis on the technology stack used and specific enhancements developed. For businesses, a more stable and transparent R&D tax credit system could mean more predictable financial planning and increased capacity for long-term innovation projects. We have revised and improved our claim preparation process as the compliance check process has progressed to block any new line of questioning that we have seen from HMRC. If this is an area in which you require support, our team of R&D specialists will be able to run through any risk areas that might need to be addressed.

How we can help

Our expert advisers have years of experience dealing with HMRC to help you navigate the changing R&D rules and protect you from an HMRC enquiry. Our highly qualified team will work with you to prepare your R&D claim. We will make sure it is fully compliant with all the latest legislation to create a strong R&D report that will explain your development work in a language that HMRC’s tax inspectors will be familiar with.

If your existing claim is under R&D enquiry and you choose us to prepare your enquiry response, we will:

• Review the submitted R&D claim to confirm the technical basis and eligibility of the claim.

• Collate any additional information required to strengthen the enquiry response.

• Prepare a written enquiry response to HMRC.

• Communicate in a way that HMRC is familiar with, without the use of generic terms.

• Draft the response using clear and precise language to prevent unjust claim rejections.

We will fully support you throughout the entire enquiry process to give your response the highest chance of success. Complete the form below and a member of our team will be in touch.