Research & Development (R&D) requires expertise

There are very generous tax breaks to encourage R&D. However, these tax advantages are only available where the projects undertaken meet a multitude of conditions. A recent tax case showed that a company was some way short of fulfilling all the criteria needed.

An R&D claim was made in respect of several projects, which aimed to make books in the company’s digital archive available in the marketplace as curated and searchable resources. HMRC rejected the company’s claim for R&D relief on the basis that there was no R&D being undertaken.

The company:

• argued that the government guidelines were open to a degree of interpretation, but the Tax Tribunal said that a narrow approach was required;
• claimed its key staff members were ‘competent professionals’, but it was clear they lacked detailed and up-to-date knowledge in software, programming and computing;
• acknowledged that the technology utilised by the company may have been used in the same manner by previous users, meaning that it was not a novel solution in the wider context (which is a requirement to get R&D relief);
• provided no evidence for any of the employee costs and other expenditure claimed; and
• did not register any patents resulting from the project.

The R&D claim was denied for the period in question, giving rise to an increase in corporation tax of just over £50,000. The company was unable to:

• demonstrate that its projects made any advance in science or technology; or
• provide evidence as to how the expenditure claimed was directly related to the projects that it did carry out.

‘Competent professional’

Many of the problems with R&D claims arise from the lack of a definition of ‘competent professional’, which the guidelines say ‘goes beyond having an intelligent interest in the field’. Company officers and employees can believe they meet that test when, in fact, they do not if they are not well advised at the outset of the project.

If you are planning to undertake R&D, we can advise you as to whether your project qualifies for the relevant tax breaks and also help you to claim them. We can also make sure you do not claim when you should not as this can lead to extra tax being due and penalties.

Photo by ThisisEngineering RAEng on Unsplash