Tax Tribunals in R&D claims and the “burden of proof”

Are you willing to stand up in a Tax Tribunal to support your company’s R&D claim? If not, perhaps you might want to read this!

HMRC appear to be having regular success at the Tax Tribunal with R&D claims at the moment. If you, or your technical staff, aren’t prepared to stand up in a Tribunal and set out what your R&D is and be prepared to be cross examined about it, you might want to exercise some heightened caution with R&D claims.

There are a number of recent Tribunal decisions which all have the same theme – your company needs to be the person who proves why your claim meets the burden of proof. And if you aren’t willing to stand up, it would appear a tax adviser isn’t going to make much of a difference to the outcome.

Following the recent decision in AHK Recruitment v The Commissioners for Revenue & Customs (see our prior blog Not all R&D is qualifying R&D) another Tax Tribunal involving Grazer Learning Ltd v Revenue & Customs has again highlighted the importance of being able to provide supporting evidence from a “competent professional” for the projects claimed in R&D Tax Relief claims.

The claim in Grazer was not particularly large (£26,050) but the claim was subject to an enquiry by HMRC. The work undertaken by the taxpayer related to a novel e-learning platform.

This is the second tribunal in a short space of time where a claim has been refused by HMRC and when the taxpayer has sought to challenge HMRC at a First Tier Tax Tribunal, the tribunal has decided in favour of the HMRC because the taxpayer has not met the “burden of proof”.

The “burden of proof” that two Tribunals have now stated explicitly is required to be shown by the taxpayer in respect of R&D tax relief claims is simply that the requirements of the BEIS Guidelines are met. The importance of meeting the burden of proof, as set out in the BEIS Guidelines (“the Guidelines”), for R&D claims has always been a key factor in making successful R&D claims.

Both AHK Recruitment and now Grazer have clearly highlighted the importance of the claimant putting forward robust support for claims which show the “burden of proof” has been met, and then being willing to stand up in a Tribunal to back up the projects claimed when required.

The judge in Grazer stated as follows:

The burden of proof is on the Appellant to establish that all, or an identifiable part, of the expenditure was incurred on work which sought to resolve a technological uncertainty and thereby achieve an advance in science and technology. The Appellant has said in its submissions that it did satisfy these criteria but this is mere assertion. It has provided no proof to that effect. The known facts are compatible with both the satisfaction of the criteria and also a failure to satisfy those criteria. In other words, it is perfectly possible from the facts which I have found that the work carried out …. was no more than a novel utilisation of the existing technology in this area or an adaptation of that existing technology which was readily deducible by a competent professional working in the field. It is far from clear that the work involved the resolution of a scientific or technical uncertainty or an advance in science or technology, as defined in the Guidelines.

And here’s the point that illustrates where the bar sits for those wanting to make claims:

In order to satisfy the burden of proof, the Appellant would have needed to provide witnesses who could have testified to the facts necessary for me to conclude that the criteria set out in the Guidelines were satisfied and who could then have been subjected to cross-examination by the Respondents. In the absence of that, I am unable to conclude that, on the balance of probabilities, the expenditure in question satisfied the relevant criteria.

The report prepared by the adviser in the case was insufficient on its own to satisfy the court that R&D had taken place and because witnesses were discounted by the judge due to not being “on time”, the Tribunal could not find in favour of the taxpayer. Unfortunately in this instance it appears that because supporting written evidence from competent professionals was provided to the Tribunal outside of the procedural timetable for such a Tribunal, the tribunal judge discounted them.

The “burden of proof” not being met by the taxpayer and so a claim not being valid is a stance HMRC appear to be taking more and more – especially with software claims. We are well aware that HMRC pay particular attention to software claims due to a number of factors, including:

  • They have in house experts and are therefore well placed to comment on software claims
  • Software claims have a tendency to focus on the output (i.e. what novel thing does the software do) rather than the input (i.e. what novel thing was done to the underlying technology) meaning taxpayers often believe there is R&D where there is not
  • The pace of change in software is so high that what was once R&D is now unlikely to be – new websites and apps are largely built using open source technology in standard ways
  • In software claims where a lot of the work is being contracted out the management of the claimant company may not actually be “competent professionals” in the field of software development – hence the need for witness statements from the software developers being used

Whenever making an R&D claim, especially one relating to software development, these Tribunal decisions are illustrating that it is critical that the company is prepared to stand behind the claim through to a Tribunal if required (HMRC and the courts are rarely interested in what the tax adviser has to say) and present appropriate witnesses if/when asked.

So what can you take from AHK Recruitment v The Commissioners for Revenue & Customs and Grazer Learning Ltd v Revenue & Customs if HMRC challenge your claim?

Put simply – if someone representing your company isn’t willing to stand up at a Tribunal as a “competent professional” and to go through why the criteria of the BEIS Guidelines are met, then your claim is probably doomed. The judge in Grazer made it clear who would be the key witnesses – it would be people the Appellant (ie the taxpayer) put forward, not a tax adviser.

It’s not just software development though – a further recent Tribunal (Hadee Engineering Co Ltd v Revenue & Customs) was a similar situation in a 2020 tribunal case where the majority of a claim by an engineering business was refused due to the company not being able to demonstrate that the claim met the required standards of proof.

HMRC has at least a year to enquire into an R&D claim following submission (even if it has already been repaid) and they can go back further if a company has not made full disclosure of the basis of the claim. When taking penalties and interest into account, an incorrect claim can get expensive.

If you’d like to find out how we can work with you on getting your claims right and making sure the burden of proof is being met, please get in touch with us at advice@taitwalker.co.uk.