So, you’ve filed a claim for R&D Tax Relief and patiently waited for HMRC to issue your tax credit refunds. Then you receive a letter from HMRC with the following response:
“The BIS Guidelines refer to an advance in science or technology as an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability per se). It is important to note that a process, material, device, product, service or source of knowledge does not become and advance in science or technology, simply because science or technology is used in its creation. A work which uses science or technology but does not advance scientific or technological capability as a whole is not an advance in science or technology. This is what needs to be illustrated.”
Wait, so what does the above statement mean? Has your claim been denied? Will your company be denied access to the tax relief funds it relies on to fuel its ongoing research & development projects?
The first thing to understand is that this is a common response that HMRC sends when querying an R&D claim. The wording itself is enough to make one’s head spin. There are certain things to do and avoid in response to a letter like this. First, the HMRC reviewer can request further documentation. The purpose of this documentation should be a display of technological advancement and the field of science in which the advancement has occurred. The ability to clearly indicate how this departs from the standard industry practice is also essential in swaying the HMRC reviewer that a technological advancement has occurred.
Through either written communication, telephone discussions, or even a site visit by the HMRC reviewer, it is critical to illustrate the technical uncertainty, when the uncertainty was determined and when and how it was overcome and turned into a technological advancement.
The facts you provide to the reviewer—either in written or verbal format—should be focused not on the commercial objectives of your project, but on the underlying technological specifications that needed to be met in order to consider the project a success. When it comes to R&D projects, while commercial goals can often constrain your technical activities, there is almost always a technological challenge that carries some of the business risk.
In some cases, HMRC may bring in an external technical expert to assist their staff in assessing the technical merits of your work through this type of dialogue, and you should feel at ease talking at the level of a technical expert when you provide your explanations. In fact, HMRC has recently announced that Inspectors now have the ability to draw on the expertise of their own Chief Technology Officer (CTO) and in-house teams that manage their IT systems when it comes to assessing claims in the ICT area. Thus, businesses making ICT-related claims should be prepared to receive queries similar to the one above, if HMRC assesses that there is risk of non-compliance in their claim due to lack of supporting materials, or poorly prepared supporting materials submitted in their claims.
If you have made an R&D tax credit claim and received a response similar to this, do not assume that your claim will be denied. The HMRC reviewer should be open to a dialogue to arrive at a mutually agreeable conclusion, so that you understand and agree with their decision. In the event that you do not agree with their assessment, it is worth noting that many court cases have ruled in favour of the tax payer in R&D tax credit cases whereby HMRC argued against the technological advancement sought or achieved. Even if you are unable to convince the reviewer that your entire project qualifies, there can be an opportunity to make a case for certain aspects or elements of the project to be considered eligible. However, you should avoid reducing your analysis to a level that is too low technologically and keep in mind that a system-level uncertainty on how different pieces of a technological system interoperate can result in a technological advancement.
Above all else, if at any time you feel as though you are in over your head, nothing beats receiving support from a competent R&D Tax Consultant who knows the best ways and methods to address HMRC queries to arrive at a positive outcome. Explore some tips here on how to choose the right consultant for your business; of particular concern in the case of a query such as the one described in this post is the significance of having a proper degree of technological specialization that allows the consultant to argue on your behalf to prove the technical merits of your claimed activities.
Jared French is an R&D tax credit consultant at RDP Associates. Jared has over 5 years of experience, and has administered over 500 successful R&D tax relief claims for his clients, who come from diverse business sectors.
T: +44 207 388 3290