What happened?
Get Onbord Limited (GoL) was a software company that provided customer onboarding solutions. This case concerned a project in which GoL sought to develop an AI analysis process for Know Your Client (KYC) verification and risk profiling, with the aim to achieve a higher analysis outcome compared to a human analysis.
GoL made their claim under the R&D tax SME scheme to receive payable tax credits. HMRC, however, launched an enquiry into their claim. They felt there was no actual advance achieved by the Company (citing paragraph 12 of the BEIS guidelines) — that the development made by GoL was a routine piece of work, in that the product used technologies that already existed to create a new process.
GoL’s advisors tried to demonstrate the advance achieved by the Company, but the claim was rejected by HMRC. After consulting with GoL’s CDIO (Chief Digital Information Officers) officers, HMRC maintained there was no advance. HMRC did not provide any evidence to GoL — at any point in the process — as to why this did not represent an advance in line with the BEIS guidelines.
It turns out, the HMRC caseworker who had raised and carried the enquiry process had no experience in software — this was the first time they had dealt with a software claim. The judge on the case found this highly frustrating. The FTT highlighted that HMRC’s current approach in dealing with enquiries is not sufficient and that openness and common sense should be applied before a case reaches the tribunal stage.
The outcome
In the end, GoL were successful in this case. The judge ruled that the claim should be allowed in its entirety. Though by this point, GoL had fallen into liquidation, so the success of the win was marred.
Of primary interest to the tribunal was the evidence provided by Mr Cahill — the Competent Professional provided by GoL. More broadly, his evidence will have a significant effect on software R&D claims industry wide. One particular statement made by Mr Cahill became key to the tribunal’s decision-making in this case. In it, he describes how, in most cases, code is created by building on existing code:
“Every piece of code is built on existing code; nobody writes code from scratch. Why would you when someone else has already done the work? GOL works by taking components and adding to them. It is rare for software development to be completely novel.”
The tribunal was clearly impressed by Mr Cahill’s strong understanding of the technological work being conducted by GoL. This led them to place a significant weight on his oral evidence. In addition, while Mr Cahill held no formal qualifications in software development, he did have over 25 years’ experience in the industry, which they considered sufficient to establish him as a Competent Professional in this context.
This is interesting, as typically, HMRC requires individuals to have formal qualifications to be considered as Competent Professionals. In fact, the tribunal drew comparison to Sam Altman, the founder of OpenAI, as an example of a Competent Professional in the field — an industry leader, but one with no formal qualifications in AI. Indeed, the tribunal’s approach to assessing
Mr Cahill’s competency seemed to focus more closely on his ability to explain the technicalities behind the project, and the assured way he answered HMRC’s questions during the hearing, rather than his specific background in software development.
From this, the tribunal drew the point that using open-source code should not determine whether a development is identified as routine, as HMRC did in this case. The question of whether improving a process or creating something new is an advance, should instead be answered in each case in isolation. It is therefore possible to use existing processes to create an overall novel advancement.
This is of vital importance, given the amount of open-source data that exists in the software industry. If this data could not be used, then it is highly unlikely that any software project would qualify.
One of the key issues this case brought out was whether the burden of proof (to substantiate the validity of the advance within science or technology) was on HMRC, or on the Company making the R&D claim. The tribunal determined that in cases where the claimant has done enough to show that there is a technological advance, the evidential burden shifts to the other side. So, the burden to provide evidence as to why the project does not represent a technological advance shifts to HMRC. HMRC failed to do this on several occasions in this case, which proved a source of great frustration for the tribunal, as the FTT stated:
“We consider that these proceedings would have been much more straightforward (and possibly could have been avoided) if, at an early stage, both parties had put their scientific cards face up on the table.”
What to take away
The impact on the software industry in this case is far-reaching. In terms of making future R&D claims, there are three main points to take away:
- The burden of proof — the case provides an insight into the burden of providing evidence and who that lies with. At the start of the claim, the burden of evidence lay with the Company to raise a case that their project constituted an overall advance in science and technology. The advance being going beyond what is publicly available or readily deducible by a Competent Professional. This case asks the question: what more can the Company do after providing satisfactory evidence? It is therefore HMRC’s role to produce evidence to show why the work conducted did not qualify, instead of providing an answer without evidence.
- Role of the Competent Professional and requirements to be classified as one — Mr Cahill’s ability to describe the technical intricacies that pertained to this case helped the tribunal to understand the context, which further reinforced their opinion of him as a Competent Professional. HMRC would usually rely on formal qualifications to determine if an individual should be a Competent Professional. However, this case demonstrates that a good understanding of the technical work conducted, an ability to clearly explain and detail complex, state of the art processes, and a substantial spell of industry experience, can all contribute to evidence of being a Competent Professional.
- Lack of a comparable tool elsewhere in the market can demonstrate that the innovation carried out is not readily deducible by other Competent Professionals — although this should not be the sole justification for an advancement, it can support the case as to the complexity of a project.
Overall, this case can be seen as a huge positive for software companies. It significantly widens the scope as to what can be considered a technological advance in the field. The tribunal accepted that just because existing processes are used in code development, that does not mean the end goal of the project cannot represent an advance.
The wider impact is this: companies across all industries can take comfort in their ability to use existing processes, materials, and products as part of their development process to achieve an advance, rather than being restricted to creating entirely novel ones.
