We always take a close look at any tribunal decisions regarding R&D claims to draw insights. Three have been completed recently with HMRC successful in two and the company concerned in another.
Soapbox Communications Limited v HMRC
This one was not particularly related to any part of the R&D specific legislation. The validity of the notice of enquiry into two amended returns was challenged. I am not going to spend a lot of time on this it appears to be an odd issue to take to tribunal. The document was sent to the companies registered address. The argument appears to be about how it was addressed. The decision was in favour of HMRC in that respect. I don't have the full facts but it appears to be a debate around a technicality.
Dnae Group Holdings Limited v HMRC
This one was interesting in the respect that the appellant won. It is a very unequal contest in terms of resources for any company to take on HMRC at tribunal. HMRC tend to be successful for a number of reasons. Quite often the appellant comes across as not being particularly competent or even engaged in winning the tribunal based solely on the written details. It is understandable that HMRC win in those circumstances. Even if the case is stronger and better presented judges tend to often default to HMRC's authority in the subject area. Judgments are often not even consistent across different tribunals so a degree of subjectivity exists.
The substance of this decision is around an assessment of the status of a company in terms of size; is the company a Small and Medium Sized Enterprise (SME) able to claim under the SME scheme or a Large Company. The large company scheme is less generous and worth roughly one third or half an SME claim depending on the tax position. In this respect status matters financially. Further, the Large Company scheme (replaced now by RDEC) has different subcontractor rules which means subcontracted R&D to other companies cannot be claimed. This again can significantly impact the financial benefit from a claim. A good starting point for the details that must be considered in assessing SME status is the flow chart found here:
HMRC argued that the company was a Large company, that an investor was not a “venture capital company”, therefore in terms of this claim a claim could only be made under the Large Company Scheme (This covered 2010 & 2011 year ends so RDEC did not exist then. The claim was old Large Company scheme which was less generous than RDEC). The appellant argued the contrary and won. The appeal was allowed. This area of the R&D scheme is heavily linked to EU state aid laws and the debate was in this area. The debate was about the difference between a strategic investment to aid a group of companies and an opportunistic one e.g. purely an investment to make money. It was decided this was the latter. This is a very complex area and often suffers from the fact that you often reach a point where terminology is used that is not precisely defined.
Grazer Learning Limited v HMRC
When covering the DNAE Group Holdings case I talked about the power imbalance between HMRC and appellants. You need a strong case, well argued, supported by both documents and testimony. Like any legal case! It appears here that a case could not be made to tip the balance of probabilities in its favour. It appears that the “competent professional” working on the project had not given evidence in the initial HMRC enquiry. I would consider it impossible to get through any HMRC R&D enquiry on qualification without such a contribution. This is basic stuff. Personally, if I cannot gain access to the technical professionals, the people doing the R&D, when preparing a claim or answering HMRC questions I walk away from a claim as I cannot gather evidence it exists. An attempt was made to introduce such evidence at the tribunal stage but the judge ruled as it had not been introduced at the enquiry stage it could not now be introduced.
The result was the following judgment; “claim for research and development tax credit – whether the activity in respect of which the expenditure was incurred qualified as research and development in accordance with the terms of the guidelines published by the Department for Business, Innovation and Skills – no, because the Appellant had failed to establish on the balance of probabilities that the activity involved a project seeking to achieve a technological advance through the resolution of a technological uncertainty – appeal dismissed”
We don't know if the company was doing qualifying R&D or not. All we do know is that they did not make the case they were when HMRC made enquiries based on the written judgment. Honestly, if you are a company facing an HMRC enquiry on any issue I would suggest giving it 100% is the best approach. R&D claims do require work, and conviction from all involved to be successful.