HMRC Software Case Studies for R&D Tax Credits: have the goalpost been clarified or narrowed?
In December 2018 HMRC posted new case studies for software / IT projects to help people understand where the boundaries are when claiming R&D tax credits for this type of project.
Understanding what these cases imply is very important to us and I would imagine our clients as well. Here are my thoughts on their implications for software R&D tax relief/credit claims.
The case studies cover "Commercial / IT Projects" for:
- Migration of data and IT services to a cloud-hosted platform to provide lower total cost of ownership
- Identification of card fraud through big data analytics and Machine Learning/Artificial Neural Network (ML/ANN)
- Appreciable improvement to the underlying technology in order to improve UI (User Interface) and User Experience (UX)
- Commercial / IT project: The development of computer vision systems
HMRC’s use of the term ‘Commercial / IT Projects’ is illuminating in itself as HMRC seems to be increasingly concerned with clarifying the boundaries between a commercial software/IT project and the claimable R&D elements within it.
The revised CIRD81960 and case studies are directly aimed at addressing the question: Where do the R&D boundaries lie within a larger commercial project? My take on the example cases is that they do narrow the goal-posts from where many specialist advisors have perceived them to be in the past.
How much does this matter given that HMRC don’t look at the majority of R&D claims?
I’d say it matters quite a bit as either a significant number of software/IT claims are going to end up being smaller or more companies are going to run the risk of falling foul of an adverse HMRC Enquiry.
It’s already tempting for people to conclude they don’t need to worry too much about whether their claims fully meet the guidelines, because HMRC hardly look at any claims. If people feel the goal posts have been unduly narrowed, this temptation is likely to grow.
However if you think HMRC is not going to look at your claims and therefore a sloppy approach is OK, or you’ve exaggerated your claims, you are definitely running a risk. Our experience is that HMRC looks at around one tenth of claims, with a greater focus on higher value claims. That might not seem like a huge risk but if you end up with an HMRC enquiry, your perspective will probably change quite rapidly. It’s like taking out an insurance policy. In good times you can’t see the need but then when things go wrong you wish you had the right cover in place.
A lot of people incorreclty think that they must have got their claims right and therefore they don’t need to change anything, because HMRC has ‘approved’ all their past claims.
If you've not been asked any questions and therfore think you’ve had your past R&D claims approved by HMRC you’re misunderstanding the UK self-assessment tax system. HMRC process your self-assessed corporation tax return each year, with the R&D claim included in it. The onus is on you/the company to do a correct self-assessment. The probability is that HMRC will not have looked at it, let alone rubber stamped the R&D elements. So it’s wrong to think that HMRC has approved an R&D claim, in most cases, all they have done is processed it, they could still look at it at some point.
What’s the answer from our perspective?
While an individual client/company may be inclined to take an over generous view of what qualifies as R&D, as advisors we can’t endorse that approach, for several reasons. You might say: “Why not, if only a one in ten cases are looked at?” The answer is that, given we support hundreds of claims, a case load of just one in twenty claims being subject to a difficult to defend challenge, would soon ramp up to be a significant headache and drain on resources. But, perhaps more importantly, from our clients’ perspective it’s beneficial that we don’t jeopardize our good reputation with HMRC, as using a reputable advisor is a key way that companies can mitigate risks associated with an R&D claim being chosen for scurtiny and/or challenged by HMRC.
Where do we go from here?
It’s hard to say how rigidly HMRC will apply the revised software guidance (CIRD81960) and associated case studies. Plus I doubt there will be an even-handed application of them. We know from experience that individual HMRC inspectors can take quite different approaches, what some will accept others will challenge – unfortunately it’s the luck of the draw.
We will continue to seek to provide our clients with a minimum risk, maximum value service and to that end, my advice is to only ever put together claims that both you and your specialist advisor would feel confident to defend, if the need arose.
Are you ready to find out if you qualify or how much your R&D claims could be worth?