Why a well-written initial report is the best argument for your R&D tax credit claim
Because we take on advisory and enquiry support work at Ziliant Tax, I often work on enquiries for claims whose reports were written by other advisors. Some of these reports are brilliant, but others can really be sub-optimal, hard to read, and pose a significant barrier to getting an enquiry closed.
So while part of my work does involve disagreeing with HMRC, there is an equal amount of work that involves re-explaining good R&D in better language so the qualifying nature of the claim can be understood. This, I have to say, is much more challenging than just getting it right to start with.
Ace of base
By far the most frequent fair objection I see from HMRC is that no advance in science or technology can be agreed because the taxpayer, in their report, has failed to establish a relevant baseline. When I read the original report, I often tend to agree but it’s typically a writing problem, rather than a flaw in the basis for the claim.
I look at the baseline as the most important part of the argument, because without it, no advance can make sense.
Most frequently, the baseline section of the report either focuses too much on:
Market conditions generally
(e.g. “The market for green energy production is worth £x billion each year in the UK alone”).
While this is useful context for framing the technology, the baseline cannot consist solely of this type of information. The baseline must explain what the current limits of the relevant technology were and why they were insufficient to meet the project brief.
The commercial landscape
(e.g. “No one had commercialised a software that could perform these functions and thus our project is unique in the marketplace”).
Again, while essential context, a baseline that only consists of the commercial opportunity/novelty fails to address the limits of technological knowledge at the outset and, as a result, any advance that follows can be justly failed by HMRC. The fact that a commercial opportunity has been missed by everyone else does not mean the solution will also qualify as an advance in technology for tax purposes.
No context at all
(e.g “The available technology consisted of a flange and a widget but this was not sufficient and so the competent professionals had to embark on an R&D project”).
This won’t do either: the writer hasn’t said what kind of work was being attempted, how the available technology attempted to address that need, how far it went in its capability and exactly how it fell short of the project aims.
So, an ideal baseline argument will contain:
The business problem in a nutshell. A short statement of the project objective to place what follows in context.
An account of the possible technological solutions to that problem that were considered, tried, researched and ultimately ruled out. Then an account of the constraints that explain why each was ruled out. Perhaps they lack function or scalability, or can only handle half the duty required, or perhaps they are too slow, too limited, too environmentally unfriendly, don’t meet fire regulations or are too expensive. Perhaps a solution existed but its technology was a trade secret.
A hypothesis: the competent professionals reasoned that X could possibly bridge the gap, followed by a statement about what remained uncertain about attempting this, exactly where risk sat, what the consequences might be of making the wrong call.
At the end of this section you should have quite a tightly constructed argument, along the lines of:
To achieve [business problem], the competent professionals sought to design a [technology] that could [specific action] cheaper/faster/greener/smarter/smaller than [baseline tech] but without [constraints that rule out the use of the baseline].
Advance
If your baseline argument has been set up correctly, then the advance will mostly write itself, because it will be a simple summary statement of (a) the difference between the current best technology and the project aim, and (b) what the competent professionals needed to do in order to achieve it.
Dressed up to the nines
However, the most frequent objection I see from HMRC relates to the way the writer has tried to tie the advance back to the DSIT guidelines. A very common fair objection is that the advance has failed to show what “appreciable improvement” has been made.
It’s important to note that, according to the guidelines, an advance need not show an appreciable improvement on something to qualify. An increase in knowledge or capability is sufficient. The reason taxpayers and some advisors sometimes find themselves here is that they have attempted to shoehorn the technological advance into DSIT 9c, without saying precisely what has been improved upon, or where a tangible improvement hasn’t been quantified.
DSIT 9c exemplifies only one of many ways in which an R&D project might be framed. There are others within DSIT 9. The core test, however, is found in DSIT 6 and calls only for an increase in overall knowledge or capability. This is far broader in scope than any of the examples in DSIT 9, so it is often much better and more coherent to express the advance in terms of DSIT 6. If it also matches some of the scenarios in DSIT 9, then fine, add them: if the technology meets the criteria in many ways that’s a good thing.
If you use DSIT 9c, then you must ensure that the “appreciable improvement” you cite actually concerns the advance itself and not the overall field or sector. For example, for a MIG welding tool that improves upon the previous best tool by using 20% less gas, then you must say exactly that and not fudge it as “An appreciable improvement in construction”. If you do the latter, HMRC can counter that you haven’t addressed the underlying technology and haven’t set your advance against a valid technological baseline – and they would be right to do so.
It can be challenging, when faced with a project that ultimately qualifies, but which has been poorly presented to HMRC in the original report, to persuade HMRC to see things differently during the compliance action. Caseworkers often choose to ignore subsequent explanations or reframings, preferring to quote the original report, as it contains imprecise or unhelpful language that is easier to invalidate.
The art of uncertainty
The next trap is to express uncertainties as matters of fact without explaining why they were not readily deducible. “The competent professionals could not readily deduce how to link the two disparate software platforms.” Well, why not? They’re supposed to be competent. If you fail to explain why this would be challenging for anyone with a good level of competence, it will be hard to argue for it during a compliance action.
Part of HMRC’s toolkit of fair questions here is, if this was legitimately uncertain, why wasn’t it mentioned in the original report?
Front-load your arguments
When under pressure to meet deadlines, it can be tempting for some to submit reports that amount to simple statements of fact, essentially kicking the hard work of justifying those statements down the line to the eventual enquiry, if it comes. I really don’t recommend this course.
Aside from the ethical question of submitting a claim that isn’t accompanied by a valid and persuasive argument, it can be much harder to justify compliant technology during an enquiry if that means making statements or taking positions that you failed to take in the initial report. HMRC is within its rights to question why you’re changing your story at this stage.
This position can be made worse if the competent professionals leave the business in the interim, leaving no one to explain what was technologically challenging.
So please don’t skimp on the original report. It need not be overly long, but it must contain valid arguments, written by people who understand both the technology and the statute and know how to write about them in persuasive Hegelian dialectic. Such people exist: there is both an Association of British Science Writers and an Institute of Scientific and Technical Communicators. I’ve been a member of both. A solid initial report is ultimately your best defence against any unfairness or misunderstanding at enquiry.
Richard Lewis MISTC
Senior technical consultant
