UK and International Tax news
FTT Finds For Taxpayer In R&D Tax Credits Case
Wednesday 21st August 2024
A software company has recently won its appeal at the FTT against HMRC’s refusal to allow its research and development tax relief claim.
In Get Onboard Limited v HMRC [2024 FTT 617 TC], the taxpayer (GOL) had submitted a claim for an R&D tax credit under s.1054 CTA 2009. HMRC rejected the claim on the basis that its project did not advance overall knowledge or capability in science or technology and therefore did not amount to research and development, a prerequisite for making a claim under the legislation.
GOL claimed that it sought to develop a novel, automated artificial intelligence analysis process for KYC verification and risk profiling. The main objective of the project was to develop AI-enabled holistic analysis of a new counterparty during a financial services customer onboarding process that could achieve a superior outcome to human analysis and meet all regulatory and legislative requirements.
According to GOL, the development of the ONBORD system constituted an appreciable improvement in the technology associated with AI for KYC analysis. The development of the system contained significant technical uncertainties, involving knowledge that could not be readily deduced by its competent professionals.
GOL considered that there was no existing technology that was available in the public domain or readily deducible by its competent professionals that would allow it to provide an automated, AI-enabled onboarding solution. Given this, GOL was not certain if it would be possible to develop the algorithms required to translate an existing risk policy into an automated onboarding process.
To successfully complete the ONBORD project, GOL would have to go through an iterative experimental development cycle plus extensive testing and analysis. It maintained that overcoming these challenges would constitute an appreciable advance in technology, as the technological advance sought would be new in the area of automated, AI-enabled onboarding processes for companies across Europe.
GOL did not know if it could develop a method to optimise the data increase the speed of a client journey and ultimately reduce the time from start of client sign-up to completion of onboarding and KYC checks. It was also uncertain if it could integrate and normalise data from various data sources to achieve this goal, using AI to validate information and auto populate any inputs required.
As more and more data was added to confirm the identification of the counterparty and ensure all regulatory requirements were met, it was necessary to develop AI methods to call the data needed for each part of the process only when required. This was needed as an alternative to calling all the data upfront, as the processing necessary to do so would slow the KYC process to a standstill and/or make the client interface unusable.
Despite GOL’s submissions, HMRC concluded that the product produced by GOL did not meet para 6 of the BEIS guidelines and had used existing processes and technologies that were readily deducible to produce a new innovative product.
On appeal, the FTT heard that GOL’s representative and director had worked for more than 25 years building models for investment banks, written code himself and described himself as an expert in building models to analyse risk.
The FTT considered that HMRC officer responsible for this case was in a difficult position, having no technology experience or expertise, nor was he aware of the credentials of those he sought advice from and who commented on his correspondence with GOL and its advisers. He did not know whether they had industry knowledge of KYC/ALM processes. This was the first software the HMRC officer had dealt with. His lack of scientific knowledge or experience meant that his evidence was of no real help to the FTT in deciding the issues.
Overall, the FTT held that, on the balance of probabilities, GOL had a project with a defined aim, the technology GOL sought to develop and incorporate in the project was not already publicly available or readily deducible, the technology it sought to develop to achieve the project’s aims amounted to more than routine copying or adaptation of an existing product or process, and the project required the resolution of technological uncertainties which a competent professional working in the field could not have readily resolved.
The FTT concluded that GOL’s project did constitute research and development within the meaning in the BEIS Guidelines. The argument that it did not was HMRC’s only objection to the claim. Therefore, GOL was entitled to make the claim and that its appeal was allowed.
This case started in 2021 and took nearly three years to resolve. The FTT commented that the proceedings would have been much more straightforward and possibly could have been avoided if, at an early stage, both parties had “put their scientific cards face up on the table. GOL could have produced a single document with all its scientific/technological evidence, including evidence from a competent professional, and HMRC should have replied with details of its own scientific analysis and evidence”.
If you would like more information on the case, please contact Keith Rushen on 0207 486 2378.
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