R&D Tax Credit crackdown has “echoes of Post Office scandal”

The CEO of a software company at the centre of a landmark R&D Tax Credit ruling has spoken out after his victory over HMRC at a tax tribunal.

Edward Cahill told me he believes that HMRC’s R&D Tax Credit processes are fundamentally flawed, aggressively punitive and could be clandestinely aimed at minimising or even abolishing R&D Tax Credits altogether.

I take a look at the background to the case, Edward Cahill’s experience of HMRC and finally get the view of a very senior ex-HMRC inspector.

Get Onbord vs HMRC

It is no exaggeration to say that this is a historic ruling with significant implications for R&D Tax Credit claimants and their advisors as it signals a crucial shift in how R&D claims should be evaluated by HMRC.

The Get Onbord case, which ruled in favour of a software company whose R&D claim had been rejected by HMRC, looked in detail at HMRC's flawed approach to assessing claims.

HMRC has been subject to much criticism since it began an inconsistent and often obstructive enquiry campaign aimed at stamping out fraudulent and incorrect claims but which has seen many valid R&D claims being rejected on the grounds that projects don’t qualify as R&D.

The case of Get Onbord went all the way to a First Tier Tribunal where HMRC was found to have ignored compelling external evidence that R&D had taken place and that it had failed to understand its own guidelines.

The case was centred on Get Onbord’s project to develop an AI system for “know your client” and risk and credit analysis, automatically and with greater speed and accuracy than the current human process.

The Tribunal recognised these efforts as significant technological advancements, not mere routine automation, and acknowledged the inherent uncertainties involved - an area where HMRC's technological challenge was notably absent.

The fact that Get Onbord produced strong external evidence that no such automated systems existed, and that there was an overarching need for one, was disregarded by HMRC and demonstrated a failure to understand that with such a compelling need, someone would already have done it if it was routine.

The Tribunal highlighted a deep-rooted misunderstanding of the way the R&D guidelines work by HMRC and its IT division, CDIO, which still appear to be looking for advances in pure and applied science rather than technological development.

The Tribunal's acceptance of using existing technologies and code in R&D claims challenges HMRC's traditional stance and represents a major victory for UK software developers.

The CEO’s perspective

Following the ruling, I spoke with the CEO of Get Onbord, Edward Cahill who praised Judge Baldwin as “considered, clear and helpful”.

However, the whole experience has left him with serious concerns over the way R&D Tax Credits are being managed by HMRC as well as questioning the political will behind this important incentive.

Mr Cahill told me:

“It seems to me that there is a belief within HMRC that R&D Tax Credit payouts should be minimised or significantly reduced and politically there may even be a view in some quarters that they should be abolished.

“To those who believe this, I would point out that the future prosperity of the UK depends on growth and I can't see where that comes from if not technological innovation. It is hard enough already but if the powers that be were to scrap R&D Tax Credits and EIS [Enterprise Investment Scheme] then any startup founder with ambition should get the first plane out of here to the US.

“For those concerned about fraud, I would say that it is very easy for someone competent to know real software innovation from the redesign of a landing page. The current process is not fit for purpose and could easily be fixed, ironically by leveraging technology.

“Something was very off about the process. At first, we thought okay they are investigating our claim - fair enough - they should spot check applications and we presumed they were acting in good faith.

“But when we responded extensively multiple times and [our advisor] Myriad Associates put their best people on it, we realised this was not a good faith actor on the other side.

“Thank goodness I had an advisor in Myriad because I would not have the knowledge or conviction to do this alone and HMRC would have fined me. They still threatened to do so but having an advisor stopped that line of attack.

“At the Tribunal there were echoes of the Post Office scandal about the whole thing. Anyone objective would have just said HMRC’s case doesn't hold up to scrutiny

“It is just bizarre to me that any agency who aspired to be fair could take such an aggressive position based on the view of a case worker relatively new to the job, with no domain knowledge, and without experience of even one software claim.

“The crazy thing is I am confident that I could give them a software solution that would immediately filter out the fraudulent claims. Relying on (I presume) lowly paid, and certainly unqualified, caseworkers to approve technical claims is not the answer”.

An ex-HMRC inspector’s view

I sought the view of a senior ex-HMRC inspector who told me that “it seems to me that the Tribunal was quite benignly inclined to the Appellant.

“While they said that it hadn’t influenced their decisions, they heard significant amounts of evidence from Mr Cahill about HMRC behaviour, which, if it was anything like other enquiry cases we have recently seen, would not impress them with its professionalism.

“For HMRC to then seek a mistrial based on procedural points when they had failed to identify in advance that the company was in liquidation, and for HMRC then to suggest that the going concern basis was failed when they had already effectively paid out, and then that the director was not a competent professional, when they had failed to produce any technological evidence or authority of their own, would probably not have gone down well.

“The Tribunal therefore rejected the request for a retrial, and also accepted Mr Cahill as a competent professional, without needing professional qualifications”.

This ruling is poised to influence how future R&D claims are assessed, particularly regarding the need for competent professional evidence and recognising technological advancements in software development.

All credit to Edward Cahill and to Barrie Dowsett of Myriad Associates for working so hard to achieve this significant judgement.

“Echoes of the Post Office scandal”

Whilst there has been real damage caused to SMEs by HMRC’s approach to R&D enquiries, the Post Office scandal was in a league of its own as innocent sub-postmasters were wrongly prosecuted for theft, fraud, and false accounting, despite strong evidence to the contrary.

There is no suggestion that HMRC is acting in a similar way here.

Nevertheless, I have heard many similar stories describing HMRC’s heavy-handed approach to some R&D Tax Credit claimants and Edward Cahill’s experience will strike a chord with many other small business owners.

Is it completely inconceivable that in a few years’ time we could see a public enquiry at which a succession of Treasury and HMRC officials deny any responsibility for needlessly sending hundreds of blameless tech start-ups to the wall?

Article written by Rufus Meakin

Rufus Meakin helps companies prepare complex R&D Tax Credit claims where robust HMRC compliance is essential.

If you would like to discuss any aspect of your R&D Tax Credit claim then please feel free to call me on 0794 110 3285.

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