AHK Recruitment Limited (“AHK”) v. HMRC (2019)
AHK is a UK based company that provides human resources (HR) services and develops HR systems. In 2014 and 2015, the company aimed to research employee attributes (e.g. values, motivation and intellect) and develop technology to assess these in a statistical, methodical way. This work sought to:
- understand the methods and science used in individual behavioural assessment and psychometric testing to date;
- create newer, up to date and more relevant criteria and methods for assessing the concepts of values, motivation and intellect;
- build assessments and revise traditional methods; and
- develop new technology to assess and measure the criteria on a large scale.
AHK had employed a consultancy firm – Optimal Compliance – to put this claim together when it was filed.
In 2016 to 2018 HMRC had numerous correspondences with AHK and Optimal Compliance. During this time AHK resubmitted the claim with more focus on the technical software work done, as social sciences (i.e. behavioural assessments and psychology) are excluded from the definition of ‘science’ in R&D guidelines. However, HMRC explained that even with this resubmission, the project appeared to be about “defining the important factors for a job applicant… rather than pushing the boundaries of known technology”. In October 2018, HMRC issued a closure notice to AHK, refusing the company’s R&D claim.
AHK was represented in court by two consultants from Optimal Compliance. Both of these men explained the project, including information about AI and Convolutional Neural Networks (CNNs), neither of which were mentioned in AHK’s/Optimal Compliance’s R&D reports. They stated that this work did not relate simply to the adaptation or fine tuning of existing technology, but to build new technology from the ground up. They said that in doing so the company faced many uncertainties including if and how AI could be used to replicate human judgment in making selection decisions for job roles. However, it was also noted that they had not spoken directly with the project manager/competent professional in the field, but spoken to another AHK employee (who was not involved in the project).
HMRC submitted that AHK had failed to prove that its project sought to achieve an advance in science or technology, and that there was a scientific or technological uncertainty that it was seeking to resolve. It stated that it had not seen any evidence of any new code being created for the project.
The court found that AHK failed to prove that it undertook qualifying R&D activities. This was because, although the company had explained the aim of the project and why it was considered an advance, it failed to provide evidence that:
- the technology it sought to develop was not already readily available;
- the technology amounted to an advance in technology within the meaning of the Guidelines and, specifically that it amounted to more than “routine…copying or adaptation of an existing product [or] process…”; and
- that there were technological uncertainties which a competent professional working in the field could not have readily resolved.
This decision was partially due to the fact that AHK’s representatives were not professionals in the software field and were not directly involved in the project. Because of this, them simply saying that the project met the criteria, without physical evidence, was not enough.
There are potentially three major learnings from this case:
- Guidelines on the Meaning of Research and Development for Tax Purposes state that for a project to be R&D, it must seek to achieve an advance in science or technology, through the resolution of scientific or technological uncertainty;
- an advance in science or technology means an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone), and
- scientific or technological uncertainty exists when there are unknowns about the feasibility or optimal method of development, which cannot be easily resolved by a competent professional in the field.
- A competent professional in the field refers to someone with experience in the industry, and typically should be someone involved in the project.
- On top of performing this work, a company needs to keep records/documentation of how it meets these guidelines.
These three points go together, as the competent professional should be able to explain how the company has met point 1, and should document this. In this case, HMRC could not see how the guidelines were met, and there was no adequate documentation, nor a relevant competent professional, to provide the needed evidence.
Read the full case here.
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