HMRC R&D Tax Relief: Winning Your Claim

Many UK companies that have submitted claims for Research and Development (R&D) tax relief have expressed frustration with HMRC’s overly stringent approach. HMRC often rejects claims, stating it has consulted “internal specialists,” such as IT experts, and is not convinced that the company’s activities qualify as R&D. This stance persists even when companies provide additional evidence or offer to meet with HMRC’s specialists. HMRC frequently insists that the claimed R&D did not contribute to the existing state of knowledge in the relevant scientific or technological field, asserting that it would have been obvious to any competent professional or that it was merely a practical workaround for a specific commercial issue.

Understanding R&D Tax Relief

Research and Development (R&D) tax relief is a government incentive designed to reward companies for investing in innovation. It allows businesses to reduce their tax bill or receive a cash credit based on their R&D expenditure. The key to a successful claim lies in providing comprehensive and accurate documentation to prove the eligibility of your R&D activities and expenditures.

Eligibility Criteria for R & D Claim

To qualify for R&D tax relief, your project must aim to advance science or technology and resolve scientific or technological uncertainties. The project should seek to achieve something that cannot be easily solved by a competent professional in the field.

Types of R&D Tax Relief — Accounting Periods Starting Before 1 April 2024

There are two types of R&D tax relief available, depending on the size of your company and whether the project has been subcontracted or subsidized.

Small and Medium-Sized Enterprise (SME) R&D Tax Relief

SME R&D tax relief is available if your company meets both of the following criteria:

·       Fewer than 500 employees

·       A turnover below 100 million euros or a balance sheet total below 86 million euros

When determining if your company qualifies as an SME, include partner and linked enterprises.

For qualifying expenditures incurred on or after 1 April 2023, you can claim a higher tax credit rate of 14.5% if you meet the intensity condition, with an R&D intensity of at least 40%.

R&D Expenditure Credit

Large companies can claim an expenditure credit for R&D projects. This credit is also available to SMEs that have been subcontracted to perform R&D work for a large company or have incurred subsidized expenditure.

There’s one merged scheme for all companies. Additionally, there is a separate scheme offering a more favorable calculation basis specifically for loss-making, R&D-intensive SMEs. The expenditure rules are consistent across both forms of relief. Typically, the entity that initiated the R&D project is the one eligible to claim the relief, even if the work is conducted under contract.

HMRC’s R&D Tax Relief Evaluation

HMRC demands a high level of evidence to prove that an R&D activity is truly innovative. This includes detailed technical reports, extensive documentation, and proof of a significant advance in the field of science or technology. Even when companies submit detailed explanations and evidence, HMRC’s rejections often lack detailed reasoning. This leaves companies in the dark about what specific aspects of their claims were found lacking, making it difficult to make necessary adjustments​

The Legal Framework

In the recent case of Get Onbord Limited [2024] UKFTT 617 (TC), the First-tier Tribunal (FTT) provided a refreshing perspective that could signal a change in HMRC’s approach to R&D claims. Get Onbord Limited (GOL) developed a technology-enabled ‘know your client’ (KYC) process aimed at improving data manipulation and management to replace traditional, error-prone human KYC processes used in the financial services sector.

HMRC’s Initial Rejection

HMRC reviewed and rejected GOL’s claim, stating that its chief digital information officers found no evidence of R&D. They argued that despite the novelty and difficulty of implementing APIs, AI, algorithms, data manipulation, and database design, there was no evidence of a scientific or technological advance. This rejection, coupled with the perception that HMRC often dismisses claims regardless of the detail or explanation provided, exacerbated taxpayer frustration.

The Tribunal’s  Decision

The FTT’s decision in favour of GOL marks a significant moment. The tribunal emphasised the importance of substantial evidence to support R&D claims and noted that while the burden of proof is on the taxpayer, there comes a point where the taxpayer has done enough to demonstrate an advance in science and technology. The FTT highlighted that if HMRC wished to contest this, it needed to provide material evidence to show the project was a routine advancement rather than an innovative one.

Download the Judgment Here

Burden of Proof on HMRC

The FTT’s ruling also provided important clarification regarding the burden of proof in R&D tax relief claims. The Tribunal emphasised that it was not lowering the burden of proof required from taxpayers. Instead, it acknowledged that GOL had met its burden by providing substantial and credible evidence of their technological advancements.

This clarification reinforces the principle that while the burden of proof remains on the taxpayer, once sufficient evidence is presented, the onus shifts to HMRC to provide a substantive counterargument. This balanced approach ensures that genuine R&D activities are appropriately recognised and rewarded, while also maintaining rigorous standards to prevent abuse of the tax relief system.

Problems with HMRC’s R&D Tax Relief Evaluation

HMRC’s assessment process for R&D tax relief is notorious for its demanding criteria and meticulous scrutiny. Many companies encounter rejections due to HMRC’s interpretation that their activities do not meet the threshold for significant scientific or technological advancement. This is often based on:

• Narrow Definitions: HMRC’s strict definitions of what constitutes an advancement can overshadow genuine innovations.
• Internal Expert Consultations: Decisions frequently involve consultations with internal specialists who may lack a comprehensive understanding of the specific technological nuances.
• Broad Rejection Reasons: Claims are often dismissed with general reasons, leaving companies unsure about the specifics of the shortfall.

Despite providing detailed documentation, including technical reports and evidence of innovation, companies frequently face rejections. This highlights the need for a strategic approach to meet HMRC’s demanding standards.

Impact on Future HMRC R&D Tax Relief Claims

GOL’s successful appeal underscores the need for HMRC to produce evidence when rejecting claims rather than relying on broad, unsupported statements. The tribunal was impressed by GOL’s witness, whose evidence provided clear evidence of the technological advancements achieved. HMRC’s witness, lacking technological expertise, failed to counter this effectively. The FTT clarified that it was not lowering the burden of proof but acknowledged that GOL had met its burden.

Expert Evidence in the FTT

The Tribunal was notably impressed by GOL’s witness, whose evidence effectively demonstrated the technological advancements achieved by the company. This witness provided clear, detailed evidence of the innovations and the challenges overcome, which played a crucial role in convincing the Tribunal of the validity of GOL’s claim. In contrast, HMRC’s witness lacked the necessary technological expertise to effectively counter GOL’s claims. This disparity underscored the importance of competent professional evidence in R&D tax relief cases. The Tribunal’s decision suggests that expert evidence, particularly from individuals with direct involvement in the R&D activities, can significantly strengthen a claim.

Specialist UK R&D Tax Advice

At LEXLAW, we specialise in navigating complex tax issues, including litigation with HMRC. Our team of experienced lawyers provides expert advice, strategic representation, and negotiation support to help businesses effectively manage HMRC’s demands. If your company faces difficulties or is in default, reach out to us today to discuss how we can protect your interests and work towards the best possible outcomes.

To successfully manage HMRC’s demands for R&D tax credit repayment, a well-informed and strategic approach is essential. By understanding the legal landscape, seeking expert advice, and demonstrating cooperation with HMRC, businesses can effectively handle these challenges and protect their financial interests. If you’re concerned about compliance, facing issues with HMRC, or considering litigation, our team can guide you through the process and provide expert support.

Expert Tax Investigation Lawyers

If you’re dealing with an HMRC Tax Investigation, our skilled team is here to assist you at every step. With in-depth knowledge of HMRC’s processes, we offer top-tier representation and defense against various inquiries and investigations, including fraud, tax inquiries, tax fraud, and criminal tax evasion. Our specialist Tax Solicitors and Barristers provide expert technical knowledge, strong negotiation skills, and respected advice, significantly influencing the outcomes of tax penalties, charges, and liabilities. If your company is under investigation, at risk, or facing potential litigation, contact us for expert support and comprehensive legal assistance.