R&D claim fails on lack of supporting evidence
AHK Recruitment company failed to provide evidence from a person involved in the project, or a relevant expert, proving the project qualified as R&D, and that the costs claimed actually related to the project in question.
AHK Recruitment Limited (AHK) provides human resources services and systems to clients, including services relating to the recruitment of new employees.
AHK claimed R&D tax relief under the SME regime in its corporation tax returns for the periods ending 31 December 2014 and 31 December 2015 (s1044 CTA 2009). AHK also claimed R&D tax credits on the basis of the R&D relief given (s1055 CTA 2009).
The R&D project’s aim was to develop software that used data-driven thinking and intelligent algorithms to establish individual “DNA” profiles for candidates and “DNA” profiles for a role within an organisation and automate the match between the two.
HMRC denied R&D claims
HMRC opened enquiries into the AHK’s corporation tax returns for 2014 and 2015, and ultimately rejected the R&D claims on the grounds that no evidence had been provided by AHK to suggest that it had advanced the technological field of IT.
AHK appealed to the FTT [TC07718].
Basis of appeal
The representatives for AHK; Hart and Redford-Jones of Optimal Compliance, argued that the R&D activity undertaken had been a serious and committed attempt to create a new piece of technology in the field of computer science and AI. The overarching uncertainty was how to achieve an AI with a high prediction accuracy in this field at a cost-effective price.
The competent professional on the project was identified as Gareth Jones, who was “competent through experience”. However, as Jones no longer worked for AHK, it had not been practicable to obtain witness evidence from him.
Use of a subcontractor
Core to this appeal was the fact that AHK had a contract with a subcontractor, Evensys Technologies Ltd (Evensys).
Despite provisions in that contract, there was no statement of work to reference. Further, Evensys’ invoices contained minimal descriptions of the work undertaken, such as “development”, “support”, and “web development”.
Hart said he had been told that the only work Evensys undertook related to the R&D project, and so all invoices related to that work.
Lack of evidence
HMRC’s argument was essentially two-pronged:
- HMRC argued that AHK did not provide sufficient evidence to substantiate its R&D claims. For example, AHK failed to prove its project sought to achieve an advance in science or technology, and also failed to identify and prove that there was a scientific or technological uncertainty that it sought to resolve. HMRC argued that AHK appeared to have been doing no more than seeking to apply existing technology to its psychometric model.
- Even if AHK had undertaken R&D activity, it had not proved the amount of the claim. The evidence relating to the subcontractor costs was inadequate and did not prove that the work undertaken by Evensys related to the project.
The FTT noted that, in order for AHK to succeed in its appeal, it needed to prove that in 2014 and 2015 it had undertaken R&D within the meaning of the legislation and the guidelines (Guidelines on the Meaning of Research and Development for Tax Purposes).
AHK would also need to prove what activities were undertaken as part of the R&D project and what costs included in its R&D claim related to R&D activities.
Although AHK, through Optimal Compliance, had made assertions as to the aim of the project, the technology it had sought to develop to achieve the project’s aim, and the uncertainties it faced and how it sought to overcome them, the FTT said that evidence was needed to prove that AHK had met the criteria to claim R&D relief.
As there was no documentary evidence (e.g. extracts from technological journals) nor evidence provided from a competent professional, the FTT was not willing to accept Optimal Compliance’s claims that the project qualified for R&D relief.
Further, even if R&D had been undertaken by AHK, the appeal would have failed on the basis that AHK had not proved that the costs included in its R&D claim related to the R&D activities. The FTT noted there was no adequate evidence as to whether the costs claimed in relation to Evensys (or in relation to AHK’s own staff) related to the activities undertaken as part of the project.
The appeal was dismissed.
In its decision, the FTT noted (twice) that it was “remarkable” that AHK did not provide evidence from someone contemporaneously involved in the project, or someone with relevant expertise who had reviewed AHK’s records.
R&D claims are notoriously complicated; this appeal serves as a keen reminder that not only is it important to have records to prove that a project meets the criteria to claim R&D relief, but that companies also need sufficient evidence to substantiate the costs within an R&D claim.