The First-tier Tribunal (FTT) case of Get Onbord Ltd (in liquidation) v HMRC [2024] UKFTT 617 (TC) has received a lot of attention since the decision was released in July 2024. A win for the taxpayer, it gives hope to other companies struggling to convince HMRC that their software activities amount to research and development (R&D), and it shines a light on how HMRC is conducting enquiries into claims for R&D tax relief. 

The case concerns the legislation in place before the significant changes made in the past few years, including the introduction of the new merged regime for accounting periods beginning on or after 1 April 2024.

Background

Get Onbord Ltd (the company) made a claim for a payable R&D tax credit under s1054, Corporation Tax Act (CTA) 2009 in respect of expenditure incurred on a software project. The project is described by the company’s advisers in the following terms: “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.”

HMRC enquired into the claim and, having reviewed the documents and other explanations provided by the company, it rejected the claim on the basis that the expenditure was not incurred on R&D. 

What is R&D?

For these purposes, R&D is defined by s1138, Corporation Tax Act 2010 (CTA 2010). The legislation begins by making reference to generally accepted accounting practice: broadly, activities that are R&D for accounting purposes are R&D for tax purposes. However, it also provides that guidelines published by the government specify activities which are, and are not to be treated as R&D. 

Perhaps the best way to approach this, as set out in the judgement in the case of BE Studios Ltd (see the table below), is to consider the accounting standards as the ‘gateway’ through which all projects must pass, but to be allowable the project must then meet the tests set out in the guidelines. 

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?

It fell to the FTT to determine whether the expenditure was incurred on R&D and in doing so it heard evidence from Mr Cahill, a former director of the company. At this point it’s worth noting that HMRC had objected to Mr Cahill giving evidence on the basis that, as the company was in liquidation, he had no capacity to represent the company at the hearing. The FTT found this procedural issue in the company’s favour, and I won’t dwell on it further here. Incidentally, the fact that the company is in liquidation did not mean that the company failed the going concern test in former s1057, CTA 2009 as the tax credit was applied before the company ceased to be a going concern. 

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. The burden of proof was on the company, and the FTT was satisfied that the company had demonstrated that: 

• the technology was not publicly available or readily deducible; 
• the company sought to do more than the routine copying or adaptation of an existing product or process; and 
• the project required the resolution of uncertainties that a competent professional working in the field could not easily resolve. 

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. 

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.”

There is also an interesting passage in the decision on the burden of proof. All parties accepted that it fell to the company to prove that its activities were R&D, and not to HMRC to justify its decision to deny the claim. However, the FTT referred to the “shifting of the evidential burden”. In simple terms, this means that if, having heard all the evidence for a particular party, a judge would conclude that that party should win the argument, it would be incumbent on the other party to present sufficient evidence to tip the scale in its favour. The implication is that HMRC failed to do enough to explain why it refused to accept the company’s evidence. In other words, a ‘computer says no’ approach will not cut it. 

In its final remarks, the FTT suggested that the case could have progressed more smoothly, or been avoided, if, at an early stage in the process, the company had marshalled all of its scientific and technological arguments in a single document, and if HMRC could have replied to that document with details of its own scientific analysis and evidence. 

Other R&D tax relief cases

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 v HMRC (2024) UKFTT 00349 (TC), 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’. Other cases that may be of interest are summarised below.

Stephen Relf, Technical Manager, Tax, ICAEW

Further information

See ICAEW’s R&D webpage for links to articles, TAXguides, recorded webinars and more.