Gripple v HMRC
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE HENDERSON,Mr Justice Henderson |
| Judgment Date | 30 June 2010 |
| Neutral Citation | [2010] EWHC 1609 (Ch) |
| Docket Number | Case No: CH/2009/APP/0674 |
| Court | Chancery Division |
| Date | 30 June 2010 |
[2010] EWHC 1609 (Ch)
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Before: Mr Justice Henderson
Case No: CH/2009/APP/0674
Mr Keith Gordon and Ms Ximena Montes Manzano (instructed by Brooke North LLP) for the Appellant
Mr David Yates (instructed by HMRC Solicitor's Office) for the Respondents
Hearing date: 11 May 2010
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Henderson:
Introduction
This appeal raises a short question about the entitlement of a company which is a small or medium-sized enterprise (“SME”) to enhanced tax relief for expenditure on research and development (“R & D tax relief”) pursuant to provisions which were first enacted in section 69 of, and schedule 20 to, the Finance Act 2000, and are now contained (together with provisions relating to certain other reliefs of a similar nature) in Part 13 of the Corporation Tax Act 2009 (sections 1039 to 1142).
The issue, shortly stated, is whether the appellant, Gripple Limited (“Gripple”), was entitled to claim R & D tax relief in its three accounting periods being the calendar years 2004, 2005 and 2006 respectively, in respect of payments which it made to an associated company, Loadhog Limited (“Loadhog”), for R & D services provided to it by Loadhog. Those services took the form of work carried out by Mr Hugh Facey, who was at all material times a director of both Gripple and Loadhog. As I understand it, he was also the founder of Gripple's business, and in conjunction with a family trust he was Gripple's controlling shareholder.
It is common ground that Gripple satisfied all but one of the conditions for grant of the relief, and that it was entitled to claim it if, but only if, the sums so paid by Gripple to Loadhog constituted expenditure on “staffing costs” within the meaning of paragraph 5(1) of schedule 20 to the 2000 Act. So far as material, paragraph 5 provides as follows:
“5(1) For the purposes of this Schedule the staffing costs of a company are –
(a) the emoluments paid by the company to directors or employees of the company, including all salaries, wages, perquisites and profits whatsoever other than benefits in kind;
(b) the secondary Class 1 national insurance contributions paid by the company; and
(c) the contributions paid by the company to any pension fund … operated for the benefit of directors or employees of the company.
…
(2) The staffing costs of a company attributable to relevant research and development are those paid to, or in respect of, directors or employees directly and actively engaged in such research and development.”
The wording of paragraph 5(1)(a) which I have quoted was substituted by the Finance Act 2004 with effect for expenditure incurred after 31 March 2004, with the object of excluding benefits in kind from the definition of staffing costs. Before the substitution, paragraph 5(1)(a) simply referred to “the earnings paid by the company to directors and employees of the company”. It is agreed that for present purposes nothing turns on this change in wording.
Gripple prepared its tax computations, and paid corporation tax under the corporate self-assessment regime, on the footing that it was entitled to claim the relief for the full amounts invoiced to it by Loadhog in respect of Mr Facey's work on R & D. HMRC disagreed, and in due course the issue came before the General Commissioners for the Division of Sheaf and Don on the hearing of appeals by Gripple against (a) HMRC's amendment of Gripple's self-assessment return for its 2004 accounting period, and (b) discovery assessments by HMRC in respect of the two following accounting periods. The hearing took place on 27 January 2009. Gripple was represented by an accountant, Mr T Holmes of Holmes Widlake Accountants. Mr Facey gave oral evidence, but there were no other witnesses. HMRC were represented by two officers, Mrs Ann Green and Mr Alan Bamford. The documents before the Commissioners consisted of a schedule of R & D statistics provided by Mr Facey, and a number of extracts from Gripple's accounts and tax returns for the relevant years, and from Mr Facey's personal tax returns, produced by HMRC.
The General Commissioners dismissed the appeals, having accepted HMRC's submission that the relevant sums paid by Gripple to Loadhog were not staffing costs within the meaning of schedule 20 paragraph 5. Gripple expressed dissatisfaction with the decision, and requested the Commissioners to state a case for the opinion of the High Court. The case stated was duly signed by the Commissioners on 4 November 2009, and the appeal came on for hearing before me on 11 May 2010. Both sides were now represented by counsel, Mr Keith Gordon and Ms Ximena Montes Manzano for Gripple and Mr David Yates for HMRC.
It is appropriate to record that this must be one of the last tax appeals to come before the High Court by way of case stated. It does so because the hearing below took place some two months before the First-tier Tribunal (Tax Chamber) came into existence on 1 April 2009 and took over the first-instance jurisdiction in respect of direct tax appeals previously exercised by the Special and General Commissioners. Unlike the Special Commissioners and the VAT and Duties Tribunal, the General Commissioners were not automatically abolished on 1 April 2009, and by virtue of paragraph 4 of the Tribunals Courts and Enforcement Act 2007 (Commencement No. 6 and Transitional Provisions) Order 2008 (SI 2008/2696) they remain in existence where there is a statement of case for the opinion of the High Court under section 56 of the Taxes Management Act 1970, so that (for example) the matter may still be remitted to them by the High Court.
By virtue of section 56(6), the appeal to the High Court lies only on questions of law arising on the case stated. The question of law formulated in paragraph 12 of the case stated in the present case is:
“Whether we have misdirected ourselves as to the application of Schedule 20 Finance Act 2000 in respect of the expenditure of [Gripple] relating to the cost of the services provided by Mr Hugh Facey.”
Legislation
R & D tax relief was introduced in 2000, with the evident purpose of providing a fiscal incentive to SMEs to incur expenditure on R & D. So long as such expenditure is incurred wholly and exclusively for the purposes of a trade carried on by the company, its full amount will be deductible in accordance with normal principles in computing the taxable profits of the trade: see section 74(1)(a) of the Income and Corporation Taxes Act 1988. Where, however, a company was entitled to claim R & D tax relief, the deductible amount of qualifying R & D expenditure was treated “as if it were an amount equal to 150% of the actual amount”: schedule 20 paragraph 13. So a deduction was allowed for one and a half times the amount of the actual expenditure.
The basic conditions of entitlement to the relief were set out in paragraph 1 of schedule 20. (Here, as elsewhere in this judgment, I refer to the legislation as amended and in force in 2005, unless the contrary is stated). For present purposes, the details are unimportant. The company has to be a SME (defined in paragraph 2 by reference to Commission Recommendation 2003/361/EC of 6 May 2003, subject to certain qualifications). There is a minimum amount of qualifying R & D expenditure (£10,000 for a 12 month accounting period), and it has to be deductible in computing the profits of a trade carried on by the company. If the company is not yet carrying on a trade, it suffices if the expenditure would be deductible if the company were carrying on a trade consisting of the activities to which the expenditure relates.
Paragraph 3 then defines “qualifying R & D expenditure”:
“3(1) For the purposes of this Schedule “qualifying R & D expenditure” of a company means expenditure that meets the following conditions.
(2) The first condition is that the expenditure is not of a capital nature.
(3) The second condition is that the expenditure is attributable to relevant research and development (see paragraph 4) directly undertaken by the company or on its behalf.
(4) The third condition is that the expenditure —
(a) is incurred on staffing costs (see paragraph 5),
(b) is incurred on software or consumable items (see paragraph 6),
(c) is qualifying expenditure on externally provided workers (see paragraphs 8A to 8E), or
(d) is qualifying expenditure on sub-contracted research and development (see paragraphs 9 to 12).
(5) The fourth condition is that any intellectual property (see paragraph 7) created as a result of the research and development to which the expenditure is attributable is, or will be, vested in the company (whether alone or with other persons).
(6) The fifth condition is that the expenditure is not incurred by the company in carrying on activities the carrying on of which is contracted out to the company by any person.
(7) The sixth condition is that the expenditure is not subsidised (see paragraph 8).”
The remaining paragraphs in Part I of the schedule then explain and amplify the conditions set out in paragraph 3. I have already quoted the relevant parts of paragraph 5, which deals with staffing costs. I should also refer to the provisions relating to qualifying expenditure on externally provided workers, the material parts of which are as follows:
“8A(1) The provisions of paragraphs 8C to 8E have effect for determining the amount of the qualifying expenditure of a company (“the company”) on externally provided workers.
(2)...
To continue reading
Request your trial
-
Berry v HMRC
...[1956] AC 14; 36 TC 207 Ensign Tankers (Leasing) Ltd v StokesTAXELR [1992] BTC 110; [1992] 1 AC 655 Gripple Ltd v R & C CommrsTAX [2010] BTC 873 IR Commrs v Burmah Oil Co LtdTAXTAX [1982] BTC 56; (1981) 54 TC 200 IR Commrs v Scottish Provident InstitutionTAXTAXTAX [2004] BTC 426; 76 TC 538 ......
-
Decision Nº ACQ 459 2010. Upper Tribunal (Lands Chamber), 03-05-2012
...v Abdulhadi Adi Shayif [2008] EWHC 2380 Buckinghamshire CC v SETR [2001] 81 P & CR 25 Gripple Ltd v Revenue and Customers Commissioners [2010] STC 2283 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 Revlon Inc v Cripps & Lee Ltd [1980] FSR 85 Commercial Solvents [1974] EC......
-
The Bampton Property Group Ltd and Others v King (an Officer Appointed by HM Revenue and Customs) and another
...by any group company applying to make a late claim to use the stranded losses against its own profits. Mr Coppel relies on Gripple v IRC [2010] STC 2283 at 23. In that case, Henderson J treated claims by companies in the same group as separate from each other in the context of relief for re......
-
Hadee Engineering Company Ltd
...closure notices were eventually issued in December 2017 following an application to the FTT by the taxpayer (see Gripple Ltd v R&C Commrs [2010] BTC 873). One of the reasons given to this earlier tribunal for the length of the investigation was that the company's director, Mr Lowe, and a nu......