What have The Simpsons and successful R&D Tax Credit claims got in common? - they are both written on two levels - for two audiences.
Software, as with all information technology, is continually changing and developing with a number of well-established branches of software that continue to evolve (e.g. artificial intelligence, cloud or mobile computing), as well as new applications for software being developed (e.g. software robots, augmented reality and internet of things, and others yet to come).
Successful R&D Tax Credit claims depend on proving the project represents an advance in overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone. Whether an advance is in overall knowledge or capability rather than a company’s own can sometimes be difficult to ascertain in the fast-moving software sector. R&D projects which were seeking such advances in previous years and were considered to meet the definition within the BEIS Guidelines may not qualify now because technological capability has increased over time, with solutions to what were previously technological uncertainties becoming available, or readily deducible, as the software industry moves forward to address new ideas.
HMRC are conscious that the words ‘research and development’ are frequently used in the software sector, and that many technical narratives are not well written. Care should be taken not to assume that a commercial project fully aligns with the definition of R&D set out in the BEIS Guidelines. It may do, but in order to be included as a qualifying R&D project for the purposes of the tax reliefs, only those parts of the commercial project that meet the criteria that are described in the BEIS Guidelines at CIRD81900 will be qualifying.
Because of the pace of change within the software industry, HMRC caseworkers are now supported by HMRC’s own IT specialists in this respect to ensure that knowledge of the industry is kept updated. The IT specialists provide advice based on their knowledge of the software industry.
So, it is fair to say that the days of putting all the technical department’s costs into a claim, in the knowledge that it was unlikely to be challenged, are numbered, if not over.
Instead, claimants will need to be a lot smarter in how they present their claims in future i.e.
- Focussing the narrative to concentrate on clearly describing the technical uncertainty and innovation addressed – and removing the routine activity (which triggers a query).
- Identifying the less obvious qualifying indirect activity which meets the stringent guidelines – often overlooked and can more than compensate for the loss of the ‘routine costs’.
- Writing the narrative in such a way as to satisfy two audiences – to be clear and understandable to the HMRC case worker, whilst at the same time providing enough technical ‘depth’ to satisfy HMRC’s computer expert – the ‘Simpsons’ approach.
Submitting a claim in this way will reduce the probability of a query, and leave the claimant well placed to defend one in the unlikely event it happens – as long as they have the time and in-depth understanding of how HMRC work!
There is no doubt some claims fail, not because the projects were inappropriate, but because they were badly described, and the claimant didn’t have the time or expertise to defend them.
MSC R&D are unique in that we have the in-depth technical expertise and the in-depth knowledge of the HMRC guidelines (we employ the man who wrote them!).
We approach every project by asking the client – “What work do you do”, not “What R&D do you do”. This way nothing is missed and our claims are optimised, compliant and defendable.
In parallel with this increased scrutiny by HMRC, which began at the start of 2019, we are finding our reputation and track record has resulted in us undertaking an increasing number of reviews of previous claims by companies who now have concerns about the quality of their previous advisor.
We review them from the perspective of an HMRC inspector and they make interesting reading!
So, if you want to be certain your claim is in the best possible hands, talk to us on 0114 230 8401 or email firstname.lastname@example.org