More First-Tier Tribunal Cases Involving R&D Tax Relief
HMRC’s increasingly bullish approach to R&D tax relief claims has been further evidenced with the recent release of three First-tier Tribunal (FTT) hearings. In 2020, hearings involving Hadee Engineering Ltd and AHK Recruitment Ltd set out HMRC’s increasingly firm stance on what constitutes qualifying R&D – with the court ruling in favour of HMRC. The latest tribunal hearings, whilst perhaps not as ‘interesting’ as the 2020 cases, all suggest HMRC are increasingly confident of allowing disputes to go to tribunal. We look at two of the hearings.
Grazer Learning Limited
The first case involves Grazer Learning Limited (the Appellant) – a company which describes itself as a small startup dedicated to developing tools to help tutors and students. The company had made a claim for SME R&D tax relief for the period ending 31 October 2017 based on the creation of platform which would take into account a learner’s prior experience and specific learning goal in offering learning content. The claim produced a payable tax credit of £26,050, an amount which was received by the company on 6th June 2018. However, an enquiry was opened into the claim on 9th September 2019. This is a perfect example of how HMRC can and will open enquiries even when a claim is paid out.
HMRC (the Respondent) disagreed with the appellant that the work undertaken constituted qualifying R&D. No agreement could be reached between the Appellant and HMRC so the case was referred to FTT. On 11th November 2020, FTT issued directions which required each party to submit evidence and statements by no later than 11th December 2020. However, the tribunal notes outline that the Appellant did not submit the required information on time, and even when evidence was submitted (late) to the FTT, it was not sent to the Respondent, despite explicit instructions to do so. The tribunal hearing notes concluded:
‘None of the four witness statements….had been sent to the Respondents prior to the hearing and the Respondents were not even aware prior to the hearing that the Appellant was proposing to adduce any witness evidence at the hearing’.
Unsurprisingly, HMRC’s litigator, Mr Daniel Hickey-Baird requested that the evidence should not form part of the hearing without a formal application to do so. The firm acting for the Appellant duly made the application which was then objected to by Mr Hickey-Baird.
The judge was then left with a dilemma over whether to allow the late evidence to be considered at the hearing. After lengthy consideration, the judge concluded ‘the fair and just approach in this case would be to continue with the hearing but refuse to allow the witness evidence in question to be admitted’. The result of this decision meant the judge had insufficient documentation and evidence to arrive at a satisfactory conclusion as to whether qualifying R&D had taken place. He commented:
‘the absence of witness evidence has made it very difficult for me to ascertain with any degree of precision the nature of the work carried out’ and then went on to conclude ‘in my view, it is wholly unclear whether the creation of the platform described in paragraph 19 above involved the creation of new technology which was designed to resolve a scientific or technological uncertainty’.
As a result, the judge commented ‘it is impossible for me to find in favour of the Appellant in this appeal’. The Appellant’s appeal against HMRC was dismissed.
Soapbox Communications Limited
The second case involved a company called Soapbox Communications Limited – an entity describing itself as a full-service studio, delivering websites, brands, publications, infographics, moving images, strategies and campaigns. Soapbox had made claims for R&D tax relief under the SME for the periods ending 31 May 2016 and 2017 (both claims were made via amended returns). The tribunal notes do not outline the basis on which the claim was made so we are left in the dark about the nature of the R&D being undertaken by the Appellant.
On 25th October 2018 HMRC issued a notice of enquiry which was addressed to:
Soapbox Communications Limited
c/o Cardens Accountants LLP
The Old Casino
28 Forth Avenue
Hove
East Sussex
BN3 2PJ
A letter was also sent to Cardens as the Appellant’s registered 64-8 agent. This letter was also sent to The Old Casino as this is the location at which Cardens operate from. On receipt of the letter, Cardens were instructed by Soapbox to send the correspondence to the R&D agent – a company called Shencoh Associates Limited. Shencoh communicated throughout the enquiry leading to a closure noticed being issued by HMRC on 11th December 2019 – 14 months after the enquiry notice was first issued.
What follows in the tribunal hearing notes is a remarkable examination over whether or not the notice of enquiry sent on 25th October 2018 was in fact valid. The Appellant argued that the address to which the notice of enquiry was sent was invalid as it included ‘c/o Cardens Accountants LLP’. The company’s registered address does not include ‘c/o Cardens Accountants LLP’ but is The Old Casino on Forth Avenue (like many companies in the UK, Soapbox was using its accountants address as its registered office). Companies Act 2000 section 1139(1) stipulates that the correct address for the service of a notice of enquiry is the company’s registered address. The appellant argued that the notice of enquiry was invalid, and therefore the closure notice served on the enquiry was also invalid (for a closure notice to be valid, there must be a valid notice of enquiry). The argument solely centred on the fact that HMRC had incorrectly included ‘c/o Cardens Accountants LLP’ when addressing the notice of enquiry to the company.
The judge roundly dismissed the arguments put forward by the Appellant and its agent. She stated that the letter addressed to the company was received by Cardens who then called the director of Soapbox outlining what had been received. Cardens were then directed by the director of Soapbox to forward to letter onto Shencoh Associates who then dealt with all matters relating to the enquiry. The judge was therefore satisfied that the taxpayer had received the notice. The judge also remarked how the use of ‘c/o’ when addressing a letter does not mean this person/entity is the one which the letter is addressed to. The use of ‘c/o’ simply signifies this person/entity is acting as post box.
The judge concluded that the closure notice was valid because the notice of enquiry was validly served.
Interestingly, the adviser in this case, Shencoh Associates Limited, is no longer trading having been placed into voluntary liquidation in July 2021. The controlling shareholders of Shencoh appear to have formed other companies which are acting as R&D tax advisory firms.
What can we learn?
It’s quite clear that HMRC are increasingly confident that disputes relating to R&D tax relief claims will go their way once they are referred to FTT. We’ve seen a significant rise in the number of claims being referred to FTT and in the majority of recent cases, the tribunal has ruled in favour of HMRC.
The Glazer Learning Ltd case is a stark reminder to all claimants of the relief that HMRC can open enquiries on claims even when they have been paid out. This is an often over-looked aspect of the scheme and we’ve often remarked how many advisers peddle the myth around 100% success rates. The simple fact is that no advisory firm can claim 100% success as claims can be challenged after the so called ‘acceptance’ from HMRC.
HMRC are increasingly taking a tight view on what constitutes qualifying R&D and this is again demonstrated in the Grazer Learning case. As has been outlined above, the judge refused to consider the late-submitted evidence from the Appellant and its adviser but it’s worth noting that the R&D report submitted by the R&D adviser and meeting notes/correspondence between the company, its R&D adviser and HMRC were at the judge’s disposal. Despite this, the judge remarked that it was still ‘wholly unclear’ as to whether new technology had been created, despite having this information to consider. From this we can only conclude that the evidence required to substantiate claims is clearly far higher than it once was.
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