The words that could cause your R&D Tax Credit claim to fail

In an interesting development for R&D Tax Credit claimants and their advisors, I can reveal that HMRC caseworkers are operating on the basis that only certain words and phrases are allowable when describing an R&D project and that other commonly used words could cause an R&D Tax Credit claim to “fail”.

A letter sent by HMRC to one R&D claimant states that only 14 specific highlighted words, terms and phrases in the R&D Tax Credit Guidelines have a precise meaning for defining and demonstrating R&D for the purposes of tax.

These are:

‘project’, ‘advance in science or technology’, ‘directly contribute’, ‘scientific or technological uncertainty’, ‘qualifying indirect activities’, ‘overall knowledge or capability’, ‘science’, ‘technology’, ‘appreciable improvement’, ‘system uncertainty’ ‘knowledge’, ‘capability’, ‘deducible’ and ‘advance’

In the letter, an HMRC caseworker states that “it is my belief that when it comes to explaining, defining or demonstrating R&D for tax purposes, only the above highlighted [14] words, terms or phrases, found in the Guidelines, have the correct meaning and legitimacy for doing this, within the given legal force by Parliamentary Regulations.”

“Any other words used…will not carry the same weight of meaning to show that a project has R&D. Therefore, these [14] ‘special’ words, terms and phrases in the Guidelines cannot be overlooked, confused, misinterpreted or replaced; when defining, explaining or demonstrating R&D in a project.

“If they are substituted by other words it could result in a serious weakness in explaining and demonstrating R&D in a project, which could be fatal to a claim, causing it to fail”.

The HMRC letter then goes on to provide a sample list of specific words that should not be used in an R&D claim, or else the claim would be disallowed by HMRC. These are:

'novel, new software, new approach, novel algorithm, unique systems and capabilities, bespoke software platform, specific situation, specific context, different, different from/attributes/principles, superior, improved, developed a means, significant, increase, optimisation, problem, difficult, complexity, technical, quality, time, process, method, concrete, unknown, not known, bid price etc'.

The caseworker goes on to explain that “all of the above [words] have been used to explain or demonstrate R&D [but] any words or terms replacing those highlighted in the Guidelines do not have the same equivalence of meaning, and are not correct to define or describe R&D for tax purposes”.

It would therefore appear unacceptable for R&D claimants to describe an R&D project other than by using the 14 defined words or phrases.

An ex-HMRC inspector's view

Peter Azu is a vastly experienced ex-HMRC inspector who is now Head of Quality Assurance at one of the UK’s leading R&D Tax Credit advisory firms for tech companies, MSC R&D.

Peter explained:

“This appears to be an insight into HMRC’s desk and task-based approach in which they have brought in their Campaigns & Project (C&P) teams to carry out widespread R&D enquiries based on perceived risks.?

“With little or no time to provide the specialist staff required to tackle the mounting evidence of fraudulent claims, it is rumoured that HMRC found a quick fix by using the C&P teams and giving them a crash course in R&D Tax Relief (up to 12 weeks).

“These teams, mainly made up of clerical caseworkers used to working risk cases are then encouraged to stick to scripts provided to them and not to deviate from them even in the face of impeccable evidence.?

“Anecdotal evidence shows that at least 90% of all HMRC enquiries follow the same pattern and use pre-scripted stencils for responses irrelevant to what information they have received.?

“Based on this, it is no surprise to find out that they have been provided with such guidance (which does not really reflect the BEIS Guidelines) and are using these 14 words phrases to pass judgement on legitimate claims.

“Previously, R&D Tax relief claims were the purview of trained inspectors who would have spent at least a few years on R&D, acquiring experience as they dealt with different sectors and cases building a nest egg of knowledge to help them in getting the tax right.

“However, with the rapid spurt in R&D claims, there was not enough time for HMRC to train inspectors at that level to tackle the problem they faced, hence the apparent dumbing down of the process”.

Another ex-HMRC inspector I spoke with told me:

“HMRC’s argument is, of course, ridiculous, and this method should not be used as a reason for denying claims. HMRC should be looking at the substance of what is described.

“The use of a particular word, potentially out of context, should not be “fatal to a claim, causing it to fail".

“Their presence should not be used as an arbitrary reason for denying a claim. Instead, HMRC should be exploring the facts and circumstances surrounding their use”.

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Article written by Rufus Meakin

Rufus Meakin works with tech companies to help ensure their R&D Tax Credit claims are accurate and defendable.

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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