A publishing company has had its R&D tax relief claim rejected by the First-tier (Tax) Tribunal for failing to meet the tests set out in the BEIS Guidelines.
Tax practitioners will doubtless be familiar with the criteria set out in the BEIS Guidelines for submitting an R&D tax credit claim. Nonetheless, a recent ruling from the First-tier (Tax) Tribunal – Flame Tree Publishing Ltd v The Commissioners for his Majesty’s Revenue and Customs [2024] UKFTT 349 (TC) – serves as a helpful reminder of the key evidence thresholds that must be met when submitting such claims.
Key points
- Evidence thresholds must be met in order for tax credit claims to succeed
- There must be a person involved in the claim who possesses sufficient expertise to be deemed a “competent professional” under the BEIS Guidelines
Background
On 30 June 2020, the appellant publishing company Flame Tree Publishing Ltd (FTP) filed an amended corporation tax return for the period ended 30 June 2018. It claimed an enhanced deduction of £266,644 in respect of expenditure on R&D, namely a development in its internal software that enabled it to provide its product. This, in turn, reduced its corporation tax liability by £50,662.
HMRC opened an enquiry into the amended return and, on 1 July 2022, issued a closure notice refusing the claim and requiring that FTP repay the £50,662. FTP appealed that decision to the Tribunal, which heard the case over two consecutive days in March.
The central issue was whether FTP could prove that it had met the tests set out in the guidelines published by the Department for Business, Innovation and Skills to entitle it to the enhanced R&D relief. HMRC argued that FTP had not met the tests in the Guidelines. It had failed to satisfy the burden of demonstrating that there was an advance, in particular, that any of its activities had resolved an uncertainty. HMRC posited therefore that there was no evidential basis for the costs which had been claimed.
Decision
The court found in favour of HMRC and dismissed FTP’s appeal. It did so principally because neither of the FTP witnesses were found to have the necessary expertise in software and computing to qualify as a “competent professional”. As such, FTP had failed to “show that the Project had either:
(a) resolved uncertainties which could not have been resolved by a competent professional, or
(b) made an improvement which a competent professional would have acknowledged as being “non-trivial”.
On costs, the tribunal found that there was no evidence provided to support the costs claimed. The tribunal highlighted that there was no time recording system in place and that the time allocations came from discussions between the business owner and its managing director. The Tribunal could not see how FTP’s managing director could have provided any useful information to that discussion since he was not involved in the project and the business owner could not tell the Tribunal how he arrived at the figures.
Key takeaways from FTP Tribunal
The judgment underlines two key things:
- The importance of evidence gathering in support of R&D costs
- The need to ensure that there are people in the claimant company (or working with the claimant company) with sufficient expertise in the scientific or technological area claimed for to ensure that they are relevant “competent professionals”. There is no definition in the Guidelines as to what is required to qualify as a “competent professional” and the phrase should take its ordinary meaning. HMRC’s view of what constitutes a competent professional can be found at CIRD81300.
Also of note is that during the hearing, FTP changed its position on how the R&D work had been undertaken. Its claim had been made on the basis that it had carried out seven separate “projects” – some major and some minor – each of which had met the requirements in the Guidelines. In evidence, it changed its position to state that there had been only a single composite project.
While occasional changes are made to the number of projects cited in claims, they’re a matter of fact, and one that should not wait until the Tribunal to be tested. That said, HMRC did not object to the change, which can be seen as positive.
Final word
The legal burden of proof in cases such as this rests with the appellant. In order to satisfy that burden of proof there must be evidence from a competent professional to demonstrate that the necessary judgments required by the Guidelines have been made by him or her. It follows that with no competent professional providing evidence to the Tribunal the appeal is bound to fail.
On the other hand, had a relevant competent professional given such evidence, it is unlikely that the appeal, on the existence of R&D at least, would have failed. They are also far more likely to be able to provide useful evidence as to the costs issue. Having said that, it is difficult to imagine that HMRC would take a case as far as Tribunal if there is a competent professional involved in the claim, and the case could be resolved long before that point.
This case is in line with the growing body of cases that demonstrate this very point, and it is important that everyone can recognise and agree the vital role of the competent professional in making the necessary judgments to arrive at the conclusion that R&D is present, and to help to quantify it.
Listen to our podcast
In this podcast, we discuss the facts and key takeaways from four R&D Tax Tribunals: Flame Tree Publishing, Get Onbord Ltd, Tills Plus Ltd and H&H Contract Scaffolding.
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