We welcome HMRCs new Guidelines for Compliance (GfC) on the meaning of R&D for tax purposes. But……….

I have been an R&D consultant for over ten years and the last year has been without a doubt the most difficult. Claims have been attacked in an aggressive and often incorrect way by HMRC and HMRC have significant powers and authority. To challenge that may take years on each case. That makes claiming unworkable for many clients, it is systemic obstruction. I recently “won” an appeal on a case that took two days short of one year. Nobody wins when anything takes a year to resolve. It could have been resolved in one hour face to face. HMRC no longer meet face to face on the majority of enquiries, especially the less wealthy companies (Surely it is ok to do this in a democracy, treat people differently on the basis of wealth? No), the best way to resolve any misunderstanding. This has made advising on any claim with certainty difficult because everyone involved can believe a claim meets all the legal requirements, and a qualified impartial authority might also think that, but HMRC often take a different view. I can believe a claim has passed a standard I know is correct because I have significant and successful Enquiry experience but none of that matters because while the rules have not changed in a legal sense HMRC are no longer behaving reasonably or playing by the same rules or even consistently on a new basis. The two letters found through this link indicate the conflict that exists. I have blogged on them previously. I do not know the individual who wrote this blog but it is an excellent summary of my feelings and experience of “being in the trenches”.

What does that “whinge” have to do with the new Guidelines for Compliance (GfC)? Well my opinion on them is they are helpful, but solve very little, to me they are not new because I interpret the main Guidelines BIS 2004 in exactly the same way as they do. I literally punched the air when I read the section that says “A qualifying project must seek to advance the knowledge or capability of the whole field. Be careful not to treat ‘readily deducible’ as meaning ‘straightforward’ or ‘not requiring much effort’” A better meaning of readily deducible is ‘able to be worked out from existing knowledge without significant effort’.”. Because this is exactly the same way I understand it. It is the only way to understand it based on the law and the English language. But the problem, I have is that in compliance checks HMRC regularly take the view that “readily deducible” means it is not possible (They use “possibly deducible” sometimes) to work it out from existing knowledge. A completely different threshold which comes close to implying if an R&D project is successful it does not qualify because it was possible to deduce. That is absurd. But that has been much of my life in the last year. This is just one example but I have seen this used multiple times.

It is therefore to be hoped that while the GfC is intended for claimants it is used equally as much by HMRC in compliance checks and we can all have a single source of truth. The GfC also aligns with the advice around the new mandatory additional information form where the compliance check argument often do not. This may be a vein hope as it is much more straightforward to understand than the current secret playbook used by HMRC to discourage claims which repeatedly uses concepts not in BEIS 2004 and therefore not law . It depends I guess if the HMRCs approach to R&D checks will remain in breach of HMRCs charter or not. A first step to behaving reasonably would be to consistently use the GfC standards and not take claimants down any debateable rabbit holes that are not part of the 2004 Guidelines. To take the latter approach is to make claiming impossible and frustrates the purpose of the law that HMRC are merely supposed to enforce not make. I am someone that tries to interpret law as written and think R&D claims would be better examined if HMRC stuck to the actual Guidelines rather than extrapolating interpretation from them.

The examples in the GfC are particularly helpful in terms of understanding concepts, as are the rarely considered ones in the main BEIS 2004 Guidelines, that may not be so obvious to those who do not specialise in R&D claims. The information can be found here.

However, I have another “But”. But the problem with the GfC is it is not law. Legally a claim is based on law. Other evidence may help a case. But on the “readily deducible” I would have to prove it was interpreted wrongly on the basis of the 2004 Guidelines not the GfC. That should not be hard because the Guidelines are supposed to be understood on the basis that words with special meanings (P2), e.g. are highlighted and defined in the Guidelines, have that meaning applied and other words are based on the Oxford English Dictionary meaning.

My view is HMRCs have three choices.

1. Lobby the Government to change the legal definition (Not really HMRCs role) to match the more extreme interpretation that appears more than one or two rogue caseworkers at enquiry. In essence change the law. Such a change would be legal. An reinterpretation beyond the laws meaning is not without the law changing. That has clearly happened, hence carnage.
2. Apply the current law, BIS 2004 and the GfC non law interpretation. In essence stop behaving the way they are and agree many more claims qualify than the current aggressive and often wrong approach suggests. Stop attacking claims that meet BEIS 2004, therefore, stop the appeals and tribunals that HMRC will lose. But help nobody as it takes so long to reach tribunal.
3. Carry on with the current approach and ultimately be left looking as stupid as HMRC were shown to be in the Concentrix scandal which has a number of similarities to the current problem e.g. a form of tax credit, a new team being bought in to “solve” a problem who are not qualified, the law and HMRC internal manuals not being followed. It has even been rumoured that the compliance checks involve the use of artificial intelligence and or unqualified outsourced workers. Journalists are looking into this.

Anyway, I have an appeal letter to write and the GfC means I have to change a lot of my work so far. It is much more effective to use HMRCs view of the law to explain why they are wrong at Enquiry when they don't follow it than mine: ) The GfC has clarified that. It is important that genuine claimants fight on and never surrender. I spoke with a company under enquiry today and their view was that they won't be bullied.

Christopher Toms MA MAAT – Compliance Director RandDTax