Tax practitioners will be familiar with various cases won by HMRC at Tribunal by arguing that there is no evidence of R&D, owing to a lack of Competent Professional (CP). Hadee, AHK and Flame Tree Publishing are three examples.
Very recently Get Onbord Ltd v HMRC (TC/2022/13281, 9 July) was decided in favour of the company. The First-tier (Tax) Tribunal determined who was a Competent Professional (CP), and therefore had before it evidence to find that R&D activities had been undertaken.
In the case of Tills Plus Ltd v HMRC [2024] UKFTT 614 (TC), the FTT had two differing sets of evidence of the work undertaken, and had to decide which they preferred.
Find out more about the role of a competent professional in R&D tax claims.
Key points
- The FTT found that a purposive approach to the interpretation of legislation was correct, and that the decision in Gripple did not prevent this.
- “Payment” should not be narrowly interpreted, and payment does not have to be made directly by the claimant to a subcontractor.
- There were two differing descriptions of the R&D claimed, and the Tribunal decided on which one it would base its decision as to the existence of R&D.
Background
The Company made R&D claims for the APEs 30 November 2018 and 30 November 2019, which resulted in a tax credit of around £390,000 (which was paid) and around £275,000 (which was not paid) respectively.
Following enquiries into the returns HMRC concluded the claims should be disallowed and issued closure notices to this effect. They also issued an assessment under paragraph 52 of Schedule 18 Finance Act 1998 to recover the tax credit paid.
During the enquiry, some consideration was given to whether the activities amounted to R&D, however HMRC’s stated reason for disallowing the claim was that payment had not been made to the subcontractor who had undertaken the work. The decision was upheld on review, and the review only considered the payment issue, not the R&D nature of the activities. The grounds for appeal were also solely on the payment issue.
This led to a submission from counsel for the appellant that the scope of the appeal should be limited to the payment issue, and that HMRC should not be allowed to raise the R&D issue. Alternatively, an adjournment was requested.
The judge considered this, and after reference to numerous decisions from the Supreme Court and the Court of Appeal, decided that HMRC could rely on the R&D issue. They also decided there should be no adjournment, since the R&D issue had been left open in the enquiry and it had been referred to in HMRC’s statement of case, which the appellant had had for quite some time. Further, HMRC had gone ‘out of their way’ in their skeleton argument to explain what the appellant would need to prove, and what evidence would be needed in respect of the R&D issue.
As regards the payment issue, the company wished to develop a new line, financed by the director’s father-in-law resident in Iran. Due to sanctions, moving money internationally was difficult, so an Iranian development partner was selected. They were paid directly by the father-in-law, and this was regarded as a loan to the director who would in turn make a loan through the director’s loan account to the company. There were no contemporaneous written agreements to this effect.
HMRC argued that the legislation should be interpreted literally, meaning the payment obligation could only be satisfied by a payment directly from the company to the subcontractor by means of a bank transfer. For the appellant it was argued that the legislation should be interpreted purposively as a literal translation would be far too restrictive, even to the point that payment would not be permitted by credit card since it would in effect be the card company paying the subcontractor and the company paying the card company. HMRC also argued that the loan was not commercial.
As regards the R&D issue, the Tribunal had evidence before it including a witness statement and oral evidence from the director and a report from an employee of the subcontractor, a Dr Zade, although that employee gave no oral evidence. Various contemporaneous emails and notes were also available.
The director, agreed not to be a CP, offered descriptions of the work said to be R&D, and the report by Dr Zade, agreed to be a CP, also described the work done. The description written by Dr Zade, however, was very different to those offered by the director. The director explained the difference was due to him not being an IT expert, and approaching the description from the point of view of a businessman.
Two interesting points arose.
- The Tribunal felt it unfortunate that they were not provided with copies of the closure notices. HMRC explained that closure notices were issued automatically, and no copy was kept. They did however have a copy of what appears to be the ‘explanation letter’ which gave them enough information to understand the reasoning behind the closure notice and therefore determine that HMRC could raise the issue of the R&D activities.
- HMRC invited the Tribunal to allow the appeal against the paragraph 52 assessment because, assuming the closure notices were upheld, ‘Tills Plus will not be entitled to the tax credit and will therefore be obliged to repay it.’ At the relevant time, paragraph 52 was the specific machinery available to HMRC to recover payments of tax credits and/or RDEC, yet HMRC were abandoning their assessment in favour of an alternative method of collection not apparent in the Taxes Acts.
At the time a paragraph 52 assessment could only be made if a discovery situation arose, or if careless or deliberate behaviour existed. This was a protection provided by Parliament until the law was changed for APs beginning on or after 1 April 2023. If HMRC can collect by sidestepping this important protection, it would be of concern.
Decision
On the payment issue, the judge found in favour of the appellant. He agreed that a purposive approach to legislation was correct, as had been decided in the Supreme Court. While Gripple had decided there was little room for a purposive construction, that had to be seen in the context of the taxpayer seeking a ‘generous construction’, and of the judge in that case referring to the legislation being given a ‘fair reading’.
All that was required for payment to have been made was that an obligation to the subcontractor was discharged (the payment by the father-in-law) at the cost or expense of the company (the obligation to repay the loan). Also, the FTT could not see the relevance of commerciality. That made no difference to whether or not a payment was made.
On the R&D issue the FTT found in favour of HMRC. Whilst the judge agreed that the report produced by Dr Zade described work that amounted to R&D, he believed that the activities described by the director were those that were actually undertaken, that they did not amount to R&D, and that no evidence had been put forward by a CP to support that work as being R&D.
Key takeaways from Tills Plus
Payment does not have to be directly made from one party to another to meet the requirement in the R&D legislation. HMRC took a very narrow view in this case. Again, HMRC used Gripple to argue for a narrow interpretation of legislation (a literal interpretation was argued for S1138 CTA 2009 in the Quinn case), but a purposive reading was approved, with the FTT qualifying Gripple with Henderson J’s reference to ‘a fair reading’.
The decision in respect of the R&D activities was decided on the facts, as would be expected. But also, as we have seen over and over again, the CP status of the person providing the facts is most important when considering whether or not R&D is present. At paragraph 120 of the decision the judge said: ‘Given the way in which these terms are explained in the Guidelines, the views of a competent professional are highly relevant as the resolution of an uncertainty is not a technological advance if it could readily be deduced or resolved by a competent professional.’
What can be argued at Tribunal can be wide, and would appear to be anything leading to the conclusion stated in the closure notice.
Final word
If you have a case that is destined for Tribunal, it must be fully prepared. To rely on HMRC not having mentioned the R&D activity specifically in the closure notice was clearly a big mistake. At least read the explanation letter very carefully to understand what HMRC may argue, but also, given the wide powers a Tribunal has to decide how it will conduct proceedings, prepare for anything.
Be especially careful if there are contradictions in the evidence. At the very least look for them, establish why they are there and be prepared to explain them to the Tribunal. And if you are not confident that the Tribunal will not accept them on the balance of probabilities, consider whether or not there is another way to settle the case rather than going to Tribunal.
Finally, nothing in this should be seen as criticism of Counsel for the Appellant, who was instructed on 12 June 2024 with the hearing due to start on 17 June 2024.
Listen to our podcast
In this podcast, we discuss the facts and key takeaways from four R&D Tax Tribunals: Tills Plus Ltd, Get Onbord Ltd, Flame Tree Publishing and H&H Contract Scaffolding.
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