That is to say, revised guidance has been prepared (in draft) but here’s the problem – it remains un-finalised and, more importantly, unpublished. What that means, of course, is that the current guidance, published in the Corporate Intangibles Research & Development (CIRD) manual at CIRD81350, doesn’t accurately reflect HMRC’s current thinking.
Given that HMRC seems to have moved from the position set out in CIRD81350, it is rather worrying that the published guidance remains unchanged. Any taxpayer, or adviser, who hasn’t been closely following the developments in this area is unlikely to be aware that CIRD81350 doesn’t actually reflect HMRC’s current thinking. What’s more, it hasn’t done for some time. Which, I would suggest, is pretty poor.
The background, for those who are interested, is as follows.
A few years ago, HMRC began to challenge R&D claims that included activities such as scale up trials or development of first-in-class, or only-in-class, assets (such as ships). Their argument was that Paragraph 28(c) of the “Guidelines on the Meaning of Research and Development for Tax Purposes” (2004 edition) precluded such activity.
Paragraph 28(c) states that:
28. Activities which do not directly contribute to the resolution of scientific or technological uncertainty include:
(c) the production and distribution of goods and services;
Paragraphs 26 to 28 are defining the term “directly contribute”, which appears in one of the key definitional paragraphs (ie paragraph 3) as follows:
3. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
It is my understanding, from talking with people who were involved in those original policy decisions and the drafting of the original guidelines, that the wording that became paragraph 28(c) was included as a sort of belt and braces just to make it absolutely clear (if that was necessary) that routine manufacturing and selling was not R&D.
Unfortunately, those words were taken and used to deny claims for activities that had previously qualified.
There was widespread disagreement with HMRC’s position but they stuck to their position and, eventually, guidance was published in the CIRD manual (as new CIRD81350) in January 2010. Although there had been a limited consultation on this guidance (the principles were circulated as a Q&A to the members of the R&D Consultative Committee), it really did little more than reinforce HMRC’s previously stated views.
At the end of 2010, in a meeting of the R&D Consultative Committee (RDCC), it was announced that HMRC would be looking again at the production issue. There were (perhaps unsurprisingly) a number of open cases where the outstanding issue was “production” and HMRC intended to continue to look in detail at the facts in those disputed cases. It would consider its approach to those cases individually, using a risk-based approach, considering the details of each claim and the merits of the respective arguments. HMRC intended to use that process to gain more insight into areas where the boundary might be interpreted as allowing wider activity than suggested by the then existing HMRC guidance. In effect, HMRC was using those open claims to gain a better understanding of the “production” issue in practice (better late than never, I suppose) with a view to deciding whether its guidance needed updating.
At the following meeting of the RDCC (in April 2011) HMRC announced that it intended to revise its guidance on production. A draft of this revised guidance was circulated for comment in late July 2011. Comments were requested by the end of September and a revised draft (based on those comments) was circulated at the start of December and discussed in a meeting of those who had responded to the consultation.
That was the last that was heard of the revised guidance on “production”