Navigating HMRC Scrutiny: Tips for Software R&D Tax Relief Claims

Are you a UK company looking to claim Research & Development Tax Relief? If so, you may want to pay close attention to the recent increase in HMRC scrutiny of claims, especially in the software space. In a bid to reduce non-compliant claims, HMRC has been closely examining R&D claims, leading to many genuine claims being caught in the crossfire.

In a recent statement, Jim Harra, the head of HMRC, highlighted the challenges faced by tax inspectors when evaluating software claims, stating that they are not software engineers. This has resulted in a higher number of enquiries into software claims, with HMRC deeming the digital technology arena as ‘high risk’.

So, what qualifies as R&D in the software sector? According to HMRC, for a claim to be approved, there must be evidence of an advance in the overall knowledge or capability, not just a company’s own state of knowledge. This can be a challenging criterion to meet in a fast-moving sector like software development.

One of the key issues is distinguishing between complexity and uncertainty in software projects. While complex projects may not necessarily qualify as R&D, projects that seek to resolve technological uncertainties do. HMRC’s evaluation criteria have not changed, but they are now scrutinizing claims more thoroughly.

To improve your chances of approval, it is essential to provide a clear technological baseline in your claim. This involves describing the field of the advance and demonstrating how your innovation has moved technology forward. Working with an experienced advisor who understands the nuances of R&D claims can be invaluable in this process.

If you are an advisor preparing R&D claims for your clients, here are some tips to consider:

1. Ensure technical ability: Having someone with strong taxation knowledge and technical software expertise can increase your chances of approval.
2. Establish a good working relationship: Regular communication with your client throughout the year can help identify key technical details for the claim.
3. Thoroughly review supporting documentation: Reviewing not just technical development documentation, but also commercial contractual relationships, can impact the eligibility of the claim.

Mark Graves, a Partner in the Innovation Tax team, has extensive experience in handling R&D claims and supporting clients under investigation. By preparing robust claims, Mark and his team have successfully navigated HMRC scrutiny and helped clients secure their tax relief.

In conclusion, with HMRC’s increased scrutiny of R&D claims, it is more important than ever to understand the criteria and nuances of the process. By working with experienced advisors like Mark Graves, you can ensure that your claim is legitimate and well-defended in the event of an investigation. Subscribe to get daily business insights and stay informed on the latest developments in R&D tax relief.