In Hadee Engineering Co Ltd v HMRC  TC07969, the First Tier Tribunal (FTT) upheld the appeal in part for closure notices regarding R&D claim enquiries. In the main, the appellant failed to meet the qualifying criteria.
The appellant was an engineering company, founded in 1969 and run by managing director Mr Peter Lowe.
- The company had submitted amended tax returns for the years 2009 and 2010, claiming R&D Relief and enhanced R&D expenditure under the Small and Medium-sized Enterprise (SME) scheme of £187,377 and £121,317 respectively.
- The claims were accompanied by a supporting R&D Report (MSC Report) prepared by MSC Business Innovation (Development) Ltd, (MSC).
- The MSC Report listed eight individual R&D projects, including one of 'General R&D' and included nine Schedules of claimed costs and calculations.
In February 2012, HMRC issued Notices of Enquiry into both periods. Further information and documents in support of the claims were requested, as was further information from MSC. MSC advised HMRC that all relevant working papers and an audit trail were held by the appellant. Over the course of the enquiries, HMRC repeatedly requested information from the appellant, MSC and one of the appellant's customers. Only limited documentation was presented.
The Appellant applied to the FTT for closure notices on the basis that all documentation had been produced. The FTT considered as part of the appeal:
- Whether the expenditure had been incurred.
- Whether the related activities qualified as R&D under the legislation and BIS Guidelines.
- Whether any arising intellectual property belonged to the appellant in terms of the 2009 claim (and so satisfying Conditions C and B of s.1052 and s.1053 CTA 2009 respectively).
- Whether the expenditure was incurred as part of activities contracted to the company by another person (and so not satisfying Conditions D and C of s.1052 and s.1053 CTA 2009 respectively).
- Whether any of the expenditure was subsidised (and so not satisfying Conditions E and D of s.1052 and s.1053 CTA 2009 respectively).
The FTT found that:
- There was very little evidence provided by the appellant to support the claim. Evidence provided by Mr Lowe was often vague, contradictory and lacked detail.
- The MSC Report lacked any detail on what source documents were used to compile the report or how the information gathered was applied.
- In terms of meeting the criteria required for a successful claim:
- Only one of the eight highlighted activities met the criteria of a project or sought to achieve an advancement through the resolution of a scientific or technological uncertainty, as required by the legislation and BIS Guidelines.
- There is no clear evidence as to how the claims were calculated. The one activity that did meet the criteria of being qualifying R&D activity was sent back to HMRC by the appellant for them to agree the exact expenditure incurred.
- Many of the activities saw the appellant reimbursed to some extent for the activities or following specific engagement terms, meaning that they failed the criteria requiring that the work not be either subsidised or contracted to the company by another person.
- Many of the activities lacked contractual terms establishing where the intellectual property would belong if created, failing to establish that the work was not contracted to the company by another.
The appeal was upheld in part for the first activity detailed, although the amount of qualifying expenditure could not be established. The appeal was dismissed for all other parts of the claim.
Useful guides on this topic
R&D Tax Relief: Overview
What is R&D Relief? How does it work? Why does the size of the company matter? What is sub-contracted R&D? How do I write an R&D Report?
R&D: SME Tax Credit Scheme
What Research & Development (R&D) schemes are available to companies undertaking R&D? How to make an R&D claim?
R&D: Staff costs, subcontractors & reimbursed expenses
What staff costs qualify for relief? Who are externally provided workers? Can you claim sub-contractor costs? Do reimbursed employee costs qualify?