What lessons can be drawn from the latest First-tier Tax Tribunal decisions?

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Phil Smith and Jayne Stokes dissect the cases and look ahead to what the Autumn might hold for R&D decisions in the inaugural episode of Time to Talk – ForrestBrown’s new podcast.

Background

In the 20-year period between 2000 – when R&D tax relief launched – and 2020, there were very few R&D cases determined by the Tax Tribunal. Yet in the time since, there’s been an upward trend, with four key R&D judgments handed down by the Tax Tribunal in recent months. At least two more are expected in the Autumn.

What do the latest cases mean in practice? And have any common themes emerged? In our new podcast – Time to Talk – Phil Smith and Jayne Stokes examine the judgments and answer these key questions.

For those unable to listen or who prefer the written highlights, here are the key points from their discussion.

The cases

First out of the blocks in February was H&H Contract Scaffolding v HMRC. Here, the appellant accepted HMRC’s decision to issue a closure notice on its R&D claim but appealed the penalty for “careless inaccuracy” that accompanied it. The burden of proof fell on HMRC to establish that the inaccuracy was because of carelessness. The Tribunal found that it had failed to provide sufficient proof and allowed H&H’s appeal.

As ForrestBrown’s technical lead, Phil Smith, noted in our podcast: “Regardless of the substance of the R&D – and it seems that the appellant accepted HMRC’s view, that there was no R&D – they were not careless.”[SJ1] 

The second case of note – Flame Tree Publishing v HMRC– followed a couple of months later. In contrast with H&H, the case was about whether the company had undertaken qualifying R&D, and specifically, whether the tests in the BEIS guidelines had been met.

HMRC argued that FTP had failed to satisfy the burden of demonstrating that there was an advance and, in particular, that any of its claimed activities had resolved an uncertainty. The court found in favour of HMRC and dismissed FTP’s appeal. Principally because neither of the FTP witnesses were found to have the necessary expertise in software and computing to qualify as a “competent professional”.

“In the absence of a competent professional, the judge will not find in favour of the taxpayer. This is consistent with other cases we’ve seen previously”, said ForrestBrown Associate Director, Jayne Stokes.

Then, like buses, two R&D judgments were handed down before the end of the court term. The first – Get Onbord Ltd v HMRC – was similar to FTP in that it concerned a software claim and the role of a competent professional.

The Tribunal had to assess whether the competent professional – someone without a formal software qualification – possessed sufficient knowledge and expertise to act in that role.

The Tribunal found GOL’s competent professional persuasive and allowed its appeal. Unlike in FTP and the other two cases noted here, the taxpayer won and HMRC lost.

“The finding by the Tribunal that Mr Cahill is a competent professional was a turning point. Once you’ve got to the position where the Tribunal has accepted a competent professional and finds their evidence persuasive – even if it’s all oral – you’re past the worst”, said Phil.

Jayne concurred: “He was an impressive witness and could speak with authority about the R&D that was undertaken. The Tribunal readily accepted that he was a competent professional.”

Last, but by no means least, the Tax Tribunal handed down the most recent of the four cases: Tills Plus Ltd v HMRC. There were two issues here. The first, whether payments to subcontractors had been paid, ie whether they met the paid requirement; and second, whether the R&D qualified in accordance with the BEIS guidelines.

On the subcontractor point, HMRCs contention was that there wasn’t a direct payment from the company to the subcontractor and therefore the paid requirement wasn’t met. The Tribunal disagreed and found in favour of the appellant on this point, but on the R&D point preferred HMRC’s evidence.

Since the R&D claim failed, it followed that even though the subcontractor had been paid, it wasn’t from the R&D because it wasn’t proven that they’d done any. As a result, Tills Plus Ltd lost its appeal.

Common themes from the Tax Tribunal decisions & what they mean for R&D tax claims

Despite three out of the four cases failing, a common theme, namely the importance of a competent professional to an R&D claim, emerged.

As Phil said: “If you don’t have a competent professional, you don’t have a claim. It’s not just a case of having a competent professional who did the R&D for you, that person needs to be willing to give evidence in support of it.”

The other theme that was considered is HMRC’s interpretation of subsidised expenditure and subcontracted R&D. This was an issue considered in Quinn (London) Ltd v HMRC– a case that ForrestBrown was involved in – where the appellant won.

Two further cases were heard by the Tribunal at the end of 2023: Stage One Creative Services v HMRC and Collins Construction v HMRC. Judgments in both cases are expected in the Autumn and are hotly anticipated.

“They should give us some clarity on what the law says and whether the tax profession is right, whether HMRC is right or whether neither of us are right about what subcontracted R&D and subsidised expenditure really mean”, said Phil.