What happened?
Tills Plus Limited is a software development firm for the hospitality industry that specialises in electronic point of sale (‘EPOS’) systems. To aid a project to develop new software, the Company entered into a ‘software development agreement’ with a subcontractor. The agreement did not set out any specific fees for the work to be done, only that the subcontractor would be invoiced every three months, and there was insufficient evidence to detail the scope of services the subcontractor was to carry out.
Crucially, all payments to the subcontractor were made via a series of interest-free personal loan agreements, rather than through physical payments from the Company’s bank account. Only qualifying costs that have been paid and incurred by the time a claim has been submitted are eligible for R&D tax relief. HMRC therefore sought to disallow the R&D claim in full on grounds that there was insufficient evidence that these payments had been made.
HMRC additionally sought to disallow the claim on the basis that the project itself did not qualify as an advance within technology. This was partially because of a lack of any competent professional testimony and explanations over the course of the enquiry, with HMRC commenting on discrepancies in some of the explanations. Most of the Company’s answers to HMRC’s questions over the course of the enquiry tended to be more ‘commercial-based’ explanations for the benefits of the software and why it was being developed, rather than specific detail into how it advances existing technology through the resolution of technological uncertainties.
The Company’s director, who had drafted the responses over the course of the enquiry, had accepted that they were not an expert in IT or artificial intelligence, but were instead more of a ‘businessman’.
The outcome
The court decided to uphold a wider interpretation of the paid requirement, stating that:
“In our view, it cannot have been Parliament’s intention that the availability of relief should depend on fine distinctions as to the way in which a payment is made to a subcontractor.”
HMRC therefore held that the relevant costs had satisfied this requirement, as the method of payment did not constitute commercial loans, and there was no interest or fixed dates for repayment.
Despite this, the tribunal decided to reject the Company’s claim on the basis that it did not qualify as a technological advancement. This was in part due to discrepancies between the information provided over the course of the enquiry into the purpose and scope of the project, as well as insufficient evidence to demonstrate the work carried out by the subcontractor. These discrepancies were explained by the Company director as being because they were not able to explain the project with a strong level of detail.
Case take away
Whilst the subcontractor costs were ultimately held to be correctly paid, this case emphasises the importance of considering the paid requirement when considering qualifying R&D costs, a point that is too often neglected when preparing R&D claims.
Additionally, this case demonstrates the necessity of competent professionals to gain a full understanding of what constitutes R&D for tax purposes, and to provide a detailed testimony of the project and work undertaken. Project boundaries should be well understood and defined, the advance should be clearly explained in full detail with comparison to an existing technological baseline, and any work undertaken by subcontractors needs to be clearly referenced.
If you have undertaken a software project that you think could qualify for R&D tax relief, feel free to get in touch — we’d be happy to assess any potential validity.
