Recent Research and Development (R&D) Tax Case Implications for Capital Allowances Claims

Appeal Number: TC/2019/06690

Grazer Learning Limited appealed against HMRC for a tax credit enquiry amounting to £26,050 regarding expenditure incurred on R&D for the accounting period ending 31 October 2017. The £26,050 was initially accepted and paid to the Appellant on 6 June 2018 but an enquiry that was opened on 5 October 2018 resulted in the Respondent denying the claim and requesting the tax credit to be repaid.

The problem that the Respondent disputed with was that the Appellant’s R&D expenditure did not fall in scope of the Guidelines. These guidelines include but are not limited to: the requirement of the expenditure being incurred in accordance with a project; the R&D is innovative – directly contributing to the advancement of science and technology and is not already existing; and is for the benefit and access to the wider audience, not just for the Appellant.

Grazer Learning Limited is a small startup company designed to help tutors and students with the use of digital learning services. The Appellant liaised with a software developer, Halcyon Consulting (“Halcyon”) to create a learning platform that would consider a learner’s previous experience and specific goals to tailor a subject area relevant to them only.

HMRC required evidence from: the director of the Appellant – to explain the underlying purpose of the R&D expenditure and the project he was asking Halcyon to perform; a representative of Halcyon – to explain the exact work carried out by them as requested by the Appellant, thus demonstrating whether the work contributed to the advancement in science and technology; and competent professionals in the related field of the project – to explain whether the work carried out Halcyon contributed to the advancement in science and technology, as well as, the resolution of scientific or technological uncertainty. The evidence, as mentioned, was required to be provided by the Appellant no later than 11 December 2020.

The Appellant failed to provide the relevant information on time. A representative had provided a witness statement from the director on 9 April 2021; and three further witness statements from one representative of Halcyon and two from alleged experts in digital learning on 13 September 2021, to the first-tier tribunal but not the Respondents. Due to the fact the Appellant failed to adhere to the deadline, the witness statements could not be used at the hearing on 16 September 2021. Instead, the judge had to rely on the R&D report; the note of a meeting between the parties; letters from a representative of the Respondents to that of the Appellant; and emails from members of Haines Watts.

Ultimately, the Respondents found the Appellant’s expenditure for R&D did not fall in scope of the Guidelines – the documents provided did not certify whether the creation of the learning platform was innovative or was no more than a novel utilization of existing technology. Additionally, the Respondents claimed they have not been provided with any original contracts between the Appellant and Halcyon, such as invoices detailing the exact nature of the work commissioned; and evidence from a competent professional in the relevant field.

The Appellant argued that: there was an area of technological uncertainty whilst carrying out the project, where the end goal is developing a new software; the witness statements carried by Halcyon and experts fell in scope of the guidelines; and the Respondents had never asked the Appellant to provide copies of the original contracts. Aforementioned, due to the lateness of these submissions by the Appellant, the judge could not accept the appeal.

Lovell Consulting View:

Based on this case study, it is essential for companies to keep and submit all relevant documents to prevent HMRC taking a case. This case also has implications for capital allowances. The key message of this case is to have properly documented fully disclosed claims and this applies equally for capital allowances. Although Lovell Consulting does not focus on R&D, we have qualified tax and quantity surveyors to help clients correctly claim capital allowances tax relief and our specialists can prevent this kind of HMRC enquiry from arising.

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