Not all R&D is qualifying R&D

HMRC can and do challenge R&D claims where they do not believe that what has been put forward in a claim is qualifying R&D. A recent tax case in which HMRC overturned a R&D claim provides a couple of interesting observations.

  1. Not all R&D is qualifying R&D (especially in software development)
  2. Knowing what the “state of the art” is will be important
  3. The competent professionals are the most important witnesses

In the case of AHK Recruitment Limited,& The Commissioners for HM Revenue & Customs a R&D adviser had put together an R&D claim in relation to “Individual Behaviour Assessment” (effectively an internal software project).

We see a lot of clients who, understandably, want to claim R&D for internal software projects, but the bar for software development claims is extremely high, and this has been the subject of updated HMRC guidance in recent years to try and clarify the rules. The guidance clearly sets out that the test of whether a software project is R&D is not typically related to the output or user experience from the software (this is largely irrelevant). The R&D must relate to the underlying software (the coding, algorithms and technology stack that drives what it does).

This is what makes it very difficult for businesses to make claims for their software projects – most businesses don’t employ software development specialists so they aren’t well placed to assess whether something is R&D for tax purposes because they probably don’t have a clear view of the “state of the art”.  If they subcontract the work to a specialist, this needs careful consideration.

In the AHK Recruitment case, we wouldn’t have said that their project qualified for R&D based on the software development rules (they were focussing on the output, which was not in a field which would qualify for relief, rather than the underlying technological development, which appeared to be voluminous rather than technically difficult) and HMRC ultimately took the same view. AHK Recruitment appealed against HMRC’s rejection of their claim but were unsuccessful.

The decision in the case focussed on what, for those who have significant experience in compiling R&D claims, tends to be the points that come across repeatedly in poorly put together R&D claims, as the judgement states:

….to meet the burden on [the claimant], the [claimant] needed provide evidence that proved:

(1) the technology it sought to develop was not already readily available;

(2) the technology it sought to develop to achieve the project’s aims amounted to an advance in technology within the meaning of the Guidelines and, specifically that it amounted to more than “routine…copying or adaptation of an existing product [or] process…”; and

(3) that there were technological uncertainties which a competent professional working in the field could not have readily resolved.

HMRC’s guidance makes it clear, and cases decided a long time ago such as BE Studios v Smith Williamson Ltd further support,R&D claims are a two stage process and before moving to look at the costs incurred, the claim must be clear why the R&D is not just “new knowledge” for the company, rather it must constitute an advance in the overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone).  In essence, there has to be some form of review of the “state of the art” and documenting of how there would be an advance in science or technology. 

Interestingly, one of the key issues with the company’s case was the inability to provide any contemporaneous evidence directly from the “competent professional” involved in the R&D – the case makes it clear that a qualified individual working at the company and contemporaneously involved in the R&D is likely to be the most convincing witness as to whether R&D was taking place and what had been considered in terms of the “state of the art”.

As advisers we can help you identify and quantify R&D, and we can help you apply the rules to your projects, but ultimately it is the staff involved who are likely to make the final call on whether something is R&D should HMRC raise queries. It’s important to engage your technical team on R&D projects and get their input to have a strong claim.

We have had similar cases where we have been able to take an R&D claim prepared by a former adviser, which had been rejected by HMRC, and have it accepted by actually focussing on the technological advances and by speaking with the correct people (the software developers). It’s best to get this right first time so speak to us if you would like help.

Other blogs in this R&D series

Episode 2 – Why use an accountant for your R&D claims?
Episode 3 – The impact of the Coronavirus Job Retention Scheme on R&D
Episode 4 – Consultation on data and cloud computing – qualifying expenditures for R&D tax credits

Contact us

For further advice, please contact Hollie Thompson at