Landmark ruling in Get Onbord Limited v HMRC
The recent case of Get Onbord Limited (GOL) v HMRC represents a significant milestone in the interpretation of Research and Development (R&D) tax credits for software development in the UK.
This landmark decision by the first-tier tribunal has important implications for small and medium-sized enterprises (SMEs) in the technology sector.
GOL, a software company, developed an automated AI process for ‘know your client’ (KYC) procedures, incorporating open-source components, code and databases.
HMRC rejected GOL's claim on the basis that its project did not advance overall knowledge or capability and therefore did not amount to research and development, which is a prerequisite for making a claim under section 1054 CTA 2009.
For tax purposes, R&D occurs when a project seeks to achieve an advance in science or technology.
When looking at the BEIS Guidelines on R&D it is worth reviewing passages 6–25, which are all relevant to the case.
Tribunal’s ruling in favour of GOL
The Tribunal ruled in favour of GOL, challenging HMRC's narrow interpretation of R&D activities, especially in software development.
Key points from the decision include:
1. Recognition of innovation using existing technologies
The tribunal acknowledged that combining existing tools and open-source software can still qualify as R&D, provided there is substantial innovation beyond routine development.
This case highlights the need for a more inclusive understanding of innovation, especially in software development where progress often involves iterative improvements on existing technologies.
GOL was not looking at KYC or risk profiling requirements themselves: it was looking to see if it could develop an AI system that could do this better than humans can. GOL’s evidence was that there was no system in the market that did this and in consequence it was uncertain whether it would be possible to build a system that could do that.
GOL has produced evidence that a massive amount of new code was written as part of the project, which goes far beyond ‘routine’ adaptation of existing technologies. The code sat on top of the information, gathered using existing sources and software/AI tools, and established a capability that was not there before.
The court accepted that using existing code (including from a code library) or other technologies already in existence (for example, using existing programming languages, frameworks and tools) is common in the software development world.
The question whether a development is an overall advance is one to be answered in individual cases (by asking whether the development is a routine advance or otherwise readily discernible), but it is not necessary for it to be the case that each component part of the solution must itself be novel or bespoke to the project in question.
Given the amount of open-source software/AI material available, if complete novelty were the test, no software project would ever amount to R&D. That is quite clearly not the case as the BEIS guidelines themselves contemplate that an appreciable improvement to an existing process can amount to R&D.
2. Critique of HMRC's assessment process
The Tribunal also noted that the HMRC inspector handling the case lacked experience in technology claims, and HMRC's specialist software team did not possess relevant industry experience. HMRC approach appears to place little or no evidentiary weight on the judgment of the company’s competent professional, instead reviewing written descriptions of the projects and making their own assessment of whether the work described represents an advance in a field of science or technology. Essentially, they appear to be elevating themselves into the role of competent professionals in this regard.
3. Burden of proof
It is well accepted practice that it is for the company making the R&D claim to substantiate its entitlement, not for HMRC to justify its decision to deny the credits claimed. However, although the burden of proof is on the claimant company, the court looked at cases where there was the need to shift the evidential burden.
It was suggested that a company might reach a point where they can assert, ‘we have provided sufficient evidence to demonstrate that our project constitutes an overall advance in science and technology. What more can the Tribunal expect from us? The burden should now shift to HMRC to present evidence showing that, despite all we have provided, our project was merely a routine advancement.’
The judgment indicates that once a company provides sufficient evidence of R&D activities, the onus shifts to HMRC to disprove the claim with substantial counter evidence.
Conclusions
This ruling has several potential impacts on the R&D tax credit landscape. It may encourage HMRC to adopt a broader and more flexible approach to assessing R&D activities, particularly in software development.
The decision could lead to increased support for SMEs driving technological progress in the UK. The case underscores the need for HMRC to invest in more skilled and experienced inspectors for evaluating R&D claims.
A more inclusive interpretation of R&D activities could foster a more vibrant and innovative business environment in the UK.
For companies currently involved in R&D tax relief claims or considering future claims, this case provides a positive precedent. It emphasises the importance of thoroughly documenting R&D activities and being prepared to defend claims with detailed evidence of technological advancements.
While this decision is a step forward for many technology companies, it remains to be seen how HMRC will adjust its approach to R&D tax relief claims in light of this ruling. Nonetheless, the Get Onbord Limited v HMRC case marks a significant development in the ongoing dialogue between innovative businesses and tax authorities in the UK.
Do not miss this article in this month’s edition on PII considerations on R&D work.