Landmark tribunal ruling: Redefining HMRC's approach to R&D tax credit claims in AI and emerging technologies
· Posted on: August 14th 2024 · read
In a recent First Tier Tribunal (FTT) ruling, a landmark decision has emerged that could significantly enhance the experience of claimants undergoing HMRC enquiries, particularly in the rapidly evolving fields of technology like artificial intelligence (AI) and machine learning (ML). The case, involving Get Onboard Ltd. (GOL), a software company that developed an innovative AI system for client verification and risk profiling, challenges HMRC's interpretation of R&D activities under the BEIS guidelines. The tribunal’s findings address key issues such as the shifting burden of proof, the uniqueness of technological solutions, and the definition of a competent professional. This decision not only highlights the importance of nuanced understanding in evaluating R&D claims but also sets a precedent that could influence HMRC's future approach to these claims, offering hope for a more consistent and fair assessment process.
Case Background
Recently, there was a significant First Tier Tribunal (FTT) result which holds the potential to improve claimants’ HMRC enquiry experience and provides a more consistent interpretation of the guidelines by HMRC inspectors, especially in emerging fields of technology such as AI/ML. This is particularly important given the recent difficulties most claimants (and specifically SMEs) have had in resolving enquiries with the Tax Credits Compliance team. This volume-based enquiry approach often involves templated responses citing simplistic Google searches as the basis for rejecting seemingly valid R&D claims, with little understanding of the technical nuance of the claimant’s R&D activities. Get Onboard Ltd. (GOL), a software company, developed an automated artificial intelligence (AI) system for Know Your Client (KYC) verification and risk profiling – a solution that simply did not exist in the public domain. HMRC contested that GOL's activities did not qualify as R&D under the BEIS (now DSIT) guidelines, on the premise that they felt the project did not advance overall knowledge or capability since the Company “has used existing processes and technologies that were readily deducible to produce a new innovative product”.
Key Findings
- Burden of proof shifting to HMRC: The tribunal highlighted the concept of shifting the evidential burden. Initially, the claimant company must demonstrate that an advance in science or technology has been made. However, once sufficient evidence is provided, the burden shifts to HMRC to provide material evidence to refute the claim. This ruling is significant as it challenges HMRC’s recent practice of denying claims without substantial justification.
- Uniqueness: The line of questioning centred heavily on whether the solution developed is unique and “enables people to do something they couldn’t do before”. This is a point increasingly brought up in HMRC enquiries as well. They accepted that “creating a new function, solving a real-world problem in a new and creative way using technology, is at least an indication that there has been an appreciable technological advance”.
- Data analytics/processing: HMRC and its Chief Digital Information Officers commented that the algorithmic development mentioned by GOL was a simple data analytics/processing problem, a line of questioning that has been common for several years now in enquiries. GOL’s assertion that this could apply to any ML/AI work is a crucial point that cannot be overlooked when assessing R&D in the AI/ML space.
- Widening the definition of a competent professional: The tribunal clarified that a competent professional does not necessarily need formal qualifications in the specific field of the project. Edward Cahill, representing GOL, demonstrated extensive experience and up-to-date knowledge in software capabilities, which the tribunal accepted as sufficient to qualify him as a competent professional, despite not primarily being a software developer. This challenges HMRC's often restricted interpretation of what constitutes a competent professional.
- The practical application of existing technologies: The FTT emphasised that using existing technologies, including open-source code, does not automatically disqualify a project from being considered R&D.
The tribunal recognised that innovation in software development frequently involves integrating and building upon existing technologies to achieve new capabilities and solve technical uncertainties.
Implications
The FTT's decision has several important implications for companies making R&D tax credit claims:
- Evidential burden on HMRC: In cases where a Company has provided significant technical information, the onus can move to HMRC to demonstrate that the work conducted does not qualify. However, this is caveated: “To the extent that the shifting of the evidential burden might suggest a lower state of satisfaction (and we are not sure that it does), that forms no part of our analysis”. This ruling may compel HMRC to provide more robust evidence when disputing R&D claims, potentially leading to fewer arbitrary rejections and more informed decision-making.
- Validation of professional expertise: Companies can support their claims with testimonies from experienced professionals in the relevant field, even if these individuals lack formal qualifications. An example given was Sam Altman, the CEO of OpenAI, who dropped out of his computer science course at Stanford.
- Integration of existing technologies: Projects that utilise existing technologies to achieve significant advancements can still qualify for R&D tax credits, provided they address technical uncertainties and contribute to new knowledge or capabilities.
Conclusions
The GOL case sets a precedent that could influence future R&D tax credit claims and HMRC's approach to assessing them. By affirming the role of experienced professionals and the legitimacy of applying existing technologies in R&D, the tribunal's decision offers a more practical and inclusive interpretation of the BEIS guidelines. Although, as an FTT decision, it is not enshrined as case law, it does favour the position of the claimant and those struggling with HMRC’s enquiries might see a softening stance.
For companies navigating the complexities of R&D tax credit claims, especially in cutting-edge fields like AI, this tribunal ruling could be a game-changer. Stay informed about your rights and ensure your claims are accurately represented. If you’re facing challenges with HMRC enquiries, now is the time to consult with an expert and strengthen your position.
