Non-compliance in R&D Tax claims from education companies is through the roof. Here’s how legitimate innovators can protect themselves from HMRC scrutiny.
Search the depths of the UK government website, and you’ll find some troubling statistics about the education sector.
According to a random audit of 500 R&D Tax Relief claims filed during the 2020-21 tax year, 87% of those submitted by education companies were not compliant. That is, they included costs and projects that are not eligible under the scheme.
This is more than any other sector. For comparison, the next-worst offender was arts, entertainment and recreation, where 61% of claims were non-compliant. Just 10% of claims in the professional, scientific and technical category fell foul of HMRC’s criteria.
Pedagogical Panic
The impact has been considerable.
Claims filed by education companies are far more likely to attract additional scrutiny via increased compliance checks. Often called enquiries, compliance checks are formal, time-consuming investigations to determine whether a claim qualifies for relief.
HMRC is reportedly using SIC codes to focus its compliance efforts, with codes like 85600: Educational Support Services more likely to attract an enquiry.
This compliance crackdown has created a lot of anxiety. Many companies eligible for R&D Tax Relief in the education sector and beyond are choosing not to file claims, forgoing funding, to avoid the risk of a lengthy investigation.
A Lesson for EdTech Companies
So, why are so many claims by education companies non-compliant? The first reason is that, under the R&D Tax Relief scheme’s guidelines, social science research is not eligible for relief.
Case closed, you might think. But this is only part of the story.
Another factor is that companies that genuinely qualify for R&D Tax Relief often struggle to prove their eligibility. In education, one reason for this is that the line separating advances in social sciences and qualifying advances in science or technology is often blurred.
Take a company developing a platform to increase pupil engagement in classrooms. Would the underlying advance be to software (which may qualify for R&D Tax Relief) or psychology (which wouldn’t)? The answer hinges on terminology such as “competent professional” and “uncertainties,” which companies can struggle to apply in their R&D.
This lack of clarity can lead companies to highlight the social sciences in advance in their claim while downplaying or completely neglecting the pursuit of an advance that would validate their eligibility.
I see this a lot in my role as Head of Enquiry Support, where I often need to rewrite third-party claims to highlight out my clients’ qualifying advances in order to resolve their compliance check.
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The Two Challenges
Fundamentally, education companies that believe they are eligible must overcome two challenges.
The first is to accurately separate qualifying and non-qualifying work and only include the former in their claim. The second is effectively proving that their claim is legitimate.
Here is my advice on how to do both.
Separating Qualifying and Non-Qualifying Work
R&D for tax purposes has a specific definition. Simply put, it is the attempt to achieve a scientific or technological advance by overcoming a scientific or technological uncertainty via methodical experimentation undertaken by a competent professional.
You can find a more detailed breakdown of this definition and the constituent terms here.
To accurately apply this definition to your work, you need to strip away the educational context and think about what is actually new underneath.
A good rule of thumb: if the advance sought and uncertainties encountered can be described without reference to the educational context, your work may be eligible for R&D Tax Relief. If they collapse the moment you take the classroom out of the picture, you are probably ineligible.
Examples of Qualifying Work
- Development of adaptive learning algorithms that advanced the state of the art and required iterative experimentation – where the technical uncertainty sits in the algorithm itself, not in what it teaches
- Building infrastructure to handle a class of data, scale, or real-time interaction that competent software developers could not solve with readily-available approaches
- Novel applications of machine learning where the advance is in the model architecture or training method, not in the educational outcome it enables
Examples of Non-Qualifying Work
- Software designed to increase student engagement, retention or motivation — this falls under pedagogy and social sciences
- Insights into how students learn drawn from data collected through your platform would be considered psychology or sociology, not a qualifying field
- Features that are new to your product but readily deducible by an experienced developer working in your stack
Proving Your Eligibility
There are four main things you can do to prove that you are eligible for R&D Tax Relief.
These tactics are effective both when preparing your claim and defending it during a compliance check.
- Be clear about which field of science or technology you’re claiming in. Software development claims need technical uncertainties tied to the underlying tools and tech stack, not to student learning or engagement
- Make sure your competent professionals are programmers or developers, not teachers or learning designers whose expertise is pedagogical theory
- Articulate the new knowledge or capability gained as something that stands on its own, separate from the teaching context
- Check your SIC code reflects what you actually do — “domestic software development” tells HMRC something very different to “educational support services”
Help is Here if You Need It
While EdTech companies remain in HMRC’s crosshairs, the sector is still rife with innovation that qualifies for R&D Tax Relief.
If you’re struggling to identify qualifying work, prepare your claim so it’s fully compliant with the latest legislation, or prove your eligibility during a tense and time-consuming compliance check, I’m here to help.
GrantTree has 15 years of experience preparing and defending compliant claims, making us well placed to help you secure and protect the funding you’re entitled to.
To learn more about how my colleagues and I can help, just get in touch.
