Over the last three years, there has been a sharp rise in HMRC R&D investigations.
With tighter scrutiny in place for R&D claims, it’s now essential to clearly demonstrate how your work advances technology. As AI adoption grows, more companies are submitting claims involving AI. That’s positive. But using advanced technology isn’t enough. To succeed, your project must advance it.
Frequently, HMRC will reject such claims on the basis that the project is “using advanced technology, rather than advancing technology”.
R&D investigations: Why are applied AI claims often investigated?
HMRC frequently rejects applied AI claims on the basis that the project:
- Only creates a commercial advantage for the company, not the wider field of technology, or
- Is “using advanced technology, rather than advancing technology”.
Outside of Silicon Valley, there are very few companies who are undertaking fundamental AI research i.e developing their own LLMs. Therefore, the vast majority of AI projects involve integrating with commercial tools provided by one of the large LLM providers. As such, it can be challenging for companies undertaking such AI based projects to evidence how they have made an advance in technology, rather than just using a commercial “black box”.
HMRC ai r&d claims challenges: The importance of framing the technological advance
When submitting AI-based R&D claims, and especially when responding to an HMRC R&D investigation, it is vital to not only describe the work that was undertaken, but to analyse this work within the overall field of AI, to demonstrate the specific advance in knowledge that has been achieved. Just describing the benefits of the AI solution, even if they are considerable in the specific use case, will not be sufficient. go beyond describing what was built.
The work must be analysed in the context of the wider AI landscape. HMRC needs to understand:
- What technological uncertainty existed
- Why existing solutions could not resolve it
- How the project sought to overcome that challenge
- What advance in knowledge or capability was achieved
Simply outlining the benefits of the AI solution, even if they are significant for the business, will not be enough.
A real-world example: when benefits weren’t enough
We were recently engaged by a client that had developed an AI chatbot designed to make customer service interactions more realistic. The technology was genuinely world-leading. Despite this, their R&D claim had been rejected by HMRC.
The claim had been submitted through a generalist accountant. The client was confident their technology would qualify.
Following an HMRC R&D investigation, there were four rounds of correspondence over a 15-month period. Ultimately, HMRC fully rejected the claim and began considering penalties for an incorrect submission.
Throughout the process, the company and their accountant focused on explaining the benefits of the AI within its application. What was missing was a clear explanation of the underlying technological advance.
This was made harder by the fact that the HMRC inspector had experience using AI tools. As a result, they did not initially appreciate the subtle but important technical differences between this solution and familiar commercial products.
