The key question for the First-tier Tribunal (FTT) to decide was whether the activities carried on by Get Onbord Ltd (the company) – as described below by the company’s advisers – were research and development (R&D). 

“The Company, Get Onbord Limited, sought to develop a novel, automated artificial intelligence (AI) analysis process for ‘know your client’ (KYC) verification and risk profiling. The main objective of this project was to develop AI-enabled holistic analysis of a new counterparty during a financial services customer onboarding process that could achieve a superior outcome to human analysis and meet all regulatory and legislative requirements.”

What is R&D?

For an activity to be classed as R&D for tax purposes, it must meet the accounting definition and satisfy the tests set out in guidelines published by the government. 

The guidelines provide that R&D takes place “when a project seeks to achieve an advance in science or technology”. Other key points from the guidelines relevant to this case in particular include the following:

• “activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D”;
• “an advance in science or technology means 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)”; 
• “scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field”; and
• a project which seeks to “make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes” is R&D.

Was the company engaged in R&D?

The FTT heard evidence from Mr Cahill, a former director of the company. Although he is not a software developer, and has no formal qualifications in this area, the FTT found Mr Cahill to be “very experienced in his field”, having worked for more than 25 years building models for investment banks. He had written code himself and was described as the “directing mind” of the company’s R&D activities. Overall, the FTT was satisfied that his “experience (including in coding) and up-to-date knowledge of software capabilities” made him a competent professional for these purposes. 

Based on the company’s evidence, including Mr Cahill’s testimony, the FTT found in favour of the company. 

Software and R&D

A sticking point with HMRC appears to have been the extent to which the company used existing code or other technologies already in existence in setting out to achieve its aims. Mr Cahill said that there was confusion on HMRC’s part as to what is involved in software development and that, pushed to the limit, HMRC’s argument would mean that no software development could be R&D because all projects use existing algorithms, etc. 

Importantly, the FTT agreed with Mr Cahill that the guidelines did not insist on “complete novelty” – if they did, how would this square with the fact that “appreciable improvement” to an existing process can amount to R&D? For the FTT, in determining whether an activity is R&D, it is not necessary that “each component part of the solution must itself be novel or bespoke to the project in question”. 

HMRC’s approach to claims

Mr Cahill and the company’s advisers criticised HMRC for “a lack of scientific knowledge and rigour”, and complained about HMRC’s general approach to the claim, which they said was out of line with how HMRC had dealt with other claims. The FTT did not comment on HMRC’s abilities or conduct although the following passages, that describe the evidence given by the HMRC officer in charge of the case, are illuminating:

“We then heard from Mr Umar, who is the HMRC officer responsible for this case. Mr Umar was in a difficult position, as he has no technology experience or expertise, nor (beyond the fact that they are members of HMRC’s in-house software development team) was he aware of the credentials of those he sought advice from and who commented on his correspondence with [the company] and its advisers. He does not know whether they had industry knowledge of KYC/ALM (sic) processes. This was the first software claim Mr Umar had dealt with.

“We found Mr Umar to be an honest, straightforward witness, who was clearly trying to help as best he could, but his lack of scientific knowledge or experience meant that his evidence was of no real help to us in deciding the issues before us.”

Words of caution

Two final points to note. First, a decision of the FTT does not set a legal precedent, and in this instance it is possible that HMRC will appeal the decision to the Upper Tribunal. Second, each case must be judged on its own merits. To help with this, attention should be paid to other cases, including those where HMRC has enjoyed success. These include the recent case of Flame Tree Publishing Ltd, where the FTT upheld HMRC’s decision to refuse a publishing company’s claim for R&D tax relief, in part because the company could not prove the involvement of a “competent professional”. 

Stephen Relf, Technical Manager, Tax, ICAEW

A longer version of this article is available at TAXline, the Tax Faculty’s online content hub. This includes a full list of other R&D tax relief cases that may be of interest.