Tribunal decisions often give a useful insight into R&D claims. The latest has just been published and the full detail can be found here:
The tribunal decision runs to fifty six pages and involves a lot of terminology and understanding of Legislation and HMRC Guidelines. Claims require more than a quick “once over”. It is hard to argue reading this report that claims are straight forward. In a self-assessment world, it is risky to assume something is correct simply because HMRC have processed it. Some online “software only” claim processors make the assertion a claim can be made in a few hours. Fifty six pages of debate about a small R&D claim ten years later is fairly clear evidence that such assertions are misguided and dangerous. R&D claims require work and good judgements.
Comment on the tribunal detail about the decision is hard without context all we are given is a summary. For example, the reason for the break with the adviser MSC and reference to “HMRC’s fraud investigators”. Was this just a standard HMRC enquiry/compliance check which I would not describe as a fraud investigation or something more serious? As a general point the overall status of a company with tax compliance can be influential. Correct book-keeping and accounting are important.
The claim is also historic covering 2009 and 2010 year ends and some of the Guidelines discussed no longer apply as the “rules” changed, most significantly in 2012. For example, owning the IP and the £10,000 threshold for R&D claims both were removed in 2012.
Some quick bullet points on the tribunal highlight the problems with this claim:
- Overstating salaries and including a bonus from a prior year, which would have been obvious being greater than the accounts figure. An apparent breach of CIRD81450.
- Incomplete (to the extent of almost non-existent) invoice trails for sales, subcontractors, and materials.
- Repeated delays in producing evidence and always less than requested.
- A conflict and then breakdown between Hadee Engineering & MSC. It is never a good idea at Enquiry to show a lack of unity.
- Estimates of expenditure (staff, material, subcontractors) were not clearly apportioned and no clear explanation was given on the basis of the estimates and how they related to the qualifying activities, therefore they could not be relied upon to be accurate or reasonable.
- Non-R&D expenditure i.e. routine work and costs of production were included in qualifying expenditure. Non qualifying work not meeting CIRD81900.
- Costs for other projects (not described and possibly non-qualifying) were included in the qualifying expenditure of the claimed projects.
- Only 1 Competent Professional (the MD) gave evidence i.e. not from subcontractors or other experienced staff who were the Competent Professionals on most of the projects, which led to an inability to explain technical complexities outside his scope.
- Inconsistencies and contradictions in many areas of the evidence produced.
- Hadee Engineering invoiced their customers and was paid specifically for hours spent in the design and development process, rather than being paid payable on the successful production, therefore they were not bearing the financial risk. Subsidised R&D does not qualify under the SME scheme CIRD81650.
- Could not show customer or subcontractor contracts, nor records of tests and results.
- No evidence of when projects started or finished (other than evidence in some cases that the development phase had been completed before the period claimed for).
- Hadee Engineering had sold some prototypes they had claimed for. This was interesting, as the law changed in 2015. Before then this issue was less clear cut CIRD82300.
- Some solutions were reached by simply exploring and discussing options (therefore routine development) and not through trial and error.
- Some solutions had been developed previously by external Competent Professionals and were provided and implemented and not developed at Hadee Engineering’s financial risk.
All the above could be viewed as creating a picture of unreliability. Some of the issues revolve not around the R&D guidelines but basic accounting record keeping. Credibility is important in any interaction with HMRC. HMRC inspectors are generally viewed as credible based on recent tribunal decisions.
In the end one of the projects claimed was allowed. The tribunal did therefore reverse the decision of the HMRC inspector in that respect. The amount of qualifying expenditure that can be claimed on that project remains to be decided. The tribunal decision is not final and could be appealed.
If you are considering an R&D claim, have been claiming and would like a review, or are involved in an R&D HMRC Enquiry and would like assistance please contact us. All we do are R&D claims.
Tim Walsh MBA CTA – Regional Director RandDTax
Chris Toms MA AAT – Compliance Director RandDTax