Hadee Engineering Company Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 December 2020 |
| Neutral Citation | [2020] UKFTT 497 (TC) |
| Date | 10 December 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 497 (TC)
Judge Jennifer Dean, Mrs Ann Christian
Mr M. Firth, Counsel appeared for the appellant
Mr M. Priestley, Officer of HM Revenue and Customs, appeared for the respondents
Corporation tax – Research and development relief – Whether expenditure qualified for such relief – Meaning of project under BIS guidelines – Evidence relating to expenditure inadequate – Claim in relation to one project satisfied legislative requirements for relief in principle – Appeal allowed to such extent – Parties to agree quantum of relief available – CTA 2009,s. 1044 and CTA 2010, s. 1138.
The First-tier Tribunal (FTT), allowed in part the taxpayers appeal against closure notices issued by HMRC in respect of the taxpayers return periods to 30 April 2009 and 30 April 2010.
In the notices, HMRC amended the taxpayer's corporation tax returns to assess additional corporation tax due to the refusal of claims for research and development (R&D) relief under CTA 2009 s. 1044. HMRC contended that the taxpayer had failed to provide evidence that expenditure incurred was attributable to projects undertaken by the taxpayer or that the projects satisfied the conditions for relief.
The tribunal found that, in the case of one project, the conditions for relief were in principle met. The appeal would thus be allowed to that extent, with the parties to determine the amount of relief, if any, available.
The taxpayer company is a long established engineering company. In April 2011 it submitted amended corporation tax returns for the years to 30 April 2009 and 2010 claiming R & D relief under the rules prevailing for those years. The claims were in respect of seven specific projects and “general R&D”. The claims were supported by a report from MSC Business Innovation (Development) Ltd (MSC), a company which provides specialist advice on such claims. HMRC commenced an enquiry into the amended returns in February 2012. A very long investigation followed; 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 number of Mr Lowe's companies were under a separate COP9, civil fraud investigation, at the time the claims were submitted. HMRC did not suggest to the tribunal in the current case that the claims were fraudulent. However, Mr Lowe stated that the interaction between the COP9 investigation and the enquiry into the claims led to MSC declining to assist the taxpayer in dealing with HMRC's enquiries.
The FTT noted that there was no dispute that the HMRC enquiries into the company's returns were valid. The provisions governing R & D relief had been considered in the High Court in Gripple Ltd v R&C Commrs [2010] BTC 873, where it had been noted that the provisions formed a “detailed and meticulously drafted code” with “a large number of carefully delineated conditions”, all of which needed to be met. The tribunal concluded that it was for the taxpayer to demonstrate that HMRC's adjustments to its returns were incorrect.
The FTT noted that despite the length of the enquiry, and the Information Notices issued to the taxpayer, direct evidence regarding the R&D relief claims was limited. The MSC report was treated as caution, as no evidence was provided to the FTT by the author and the report was thus untested; the report also expressly stated that the contents of the report were the responsibility of the taxpayer. HMRC pointed to the lack of documentary evidence linking the claimed expenditure to the activities undertaken, and to a number of factors in respect of the conduct of each project, which suggested that the conditions for relief were not met for any of the expenditure claimed.
The taxpayer did not provide evidence in support of the “general R&D” part of the claim, and this part of the claim was withdrawn.
The taxpayer's case was largely based around a witness statement given by Mr Lowe, in which he outlined each of the projects undertaken by the company which were the subject of the claims. The FTT considered that Mr Lowe's evidence was vague and at times contradictory. Although the tribunal accepted the passage of time may have affected Mr Lowe's recollection of events, the combination of factors such as inconsistencies, lack of detail and knowledge on pertinent matters and Mr Lowe's acceptance that elements of his witness statements were inaccurate, undermined the reliability of his evidence as a whole.
The FTT did examine each of the seven specific projects covered by the MSC report in light of the evidence given by Mr Lowe. In six cases the tribunal found that Mr Lowe's evidence was at least vague, if not unreliable, and they were satisfied that the conditions for giving relief were not met. In one case only, that of a project involving marine gears, the tribunal considered that the work undertaken did represent a project seeking an advancement in science and technology; although there was a lack of documentation, the tribunal accepted Mr Lowe's verbal evidence as showing he had worked to a plan designed to achieve the required outcome. In this instance HMRC had accepted that the activity could constitute R&D. The tribunal was also satisfied on the basis of Mr Lowe's evidence that, had any IP been created it rested with the taxpayer rather than anyone else, and the project had been carried out independently and without subsidy. HMRC had noted that if the tribunal accepted Mr Lowe's evidence here, it would not dispute the conditions were met. However, even in this case, whilst the conditions for relief in principle were met, it was clear the tribunal that the quantum of the claim was wrong, and included elements that did not meet the required conditions or were overstated.
The taxpayer's appeal against the closure notices was allowed to the extent that, in principle, some expenditure in regard to the project involving marine gears qualified for relief. However, the quantum of relief, if any, would need to be determined between the taxpayer and HMRC. If this was not possible, a further hearing would need to be requested.
This case does not add greatly to the interpretation of the legislation around research and development relief. The FTT noted that, in effect, the first basic requirement for relief is that a project for the advancement of science and technology is needed; and both BIS guidelines (as they were at the time of the claim) envisaged a “project” being a series of activities undertaken in a planned manner. The tribunal searched for evidence of a series of planned activities in each of what the taxpayer described as “projects” but only deafinitively succeeded in one case. The lack of documentary evidence meant that the vast majority of the expenditure claimed could not be verified as meeting the required guidelines, with in several cases multiple conditions not being shown to be met. This case provides a clear warning that taxpayers who do not keep adequate records are unlikely to be able to demonstrate that they are entitled to tax reliefs, and are opening themselves to lengthy and intrusive investigation of their tax affairs.
[1] The Appellant appeals against two closure notices issued by the Respondents (“HMRC”) on 10 January 2018 whereby the Appellant's tax returns for the accounting periods ended 30 April 2009 and 30 April 2010 (“CT returns”) were amended so as to assess the Appellant to dditional Corporation Tax of £51,065.56 and £33,968.76 respectively by refusing the Appellant's claims for Research and Development Relief (“R&D”) made under s1044 Corporation Tax Act 2009 (“CTA 2009”).
[2] The following is a summary of the key interactions and events. Mr Peter Lowe is the Managing Director of the Appellant, an engineering company, which was founded in 1969. The Appellant's original CT returns for 2009 and 2010 were submitted on 12 January 2010 and 4 April 2011 respectively. They did not contain any claims for R&D.
[3] On 20 April 2011 the Appellant submitted amended returns for 2009 and 2010 claiming enhanced R&D CT deductions of £182,377 and £121,317 respectively. On 26 April 2011 the Appellant filed a Research and Development Report (“the MSC Report”) which had been prepared by MSC Business Innovation (Development) Limited (“MSC”) in support of the R&D claims.
[4] The claims were made under the Small and Medium sized Enterprise (“SME”) Scheme claiming addition enhanced expenditure of 75%. There following projects were contained within the MSC Report:
- Marine Gear Welding;
- Double Deck Loader;
- Hollow Ingot Manipulator;
- Trombone Walkway Gantry;
- 5,000 Tonne Manipulator Track;
- Tilting Wash Down System;
- Animal Centrifuge;
- General R&D.
[5] The Report also included schedules setting out:
- Itemised staff costs and man-day calculations (Schedules 1 – 5);
- Calculated utility costs (Schedule 6);
- Detailed sub-contractor costs (Schedule 7);
- Itemised consumable costs (Schedule 8);
- A summary of calculations per year (Schedule 9).
[6] The Report stated that the Appellant invests:
in research and development to build its own portfolio of original products and technologies … The company is constantly investigating the potential for new concepts and ideas that emerge, primarily from its established customer base within the world of heavy engineering.
[7] On 6 February 2012 HMRC issued Notices of Enquiry under paragraph 24 Schedule 19 Finance Act 1998 in relation to the two relevant periods. HMRC also requested further documents and information in support of the Appellant's claims, including a request for information from MSC.
[8] On 20 March 2012 MSC advised HMRC that the Appellant was in possession of all relevant working papers and...
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