UK and International Tax news
FTT Hears Research & Development Expenditure Case
Wednesday 20th October 2021
The First Tier Tribunal has recently heard an appeal concerning research and development expenditure.
In Grazer Learning Ltd v HMRC, 2021 UKFTT 0348 (TC), the Appellant had claimed a tax credit of £26,050 in respect of expenditure incurred on research and development in its accounting period ending 31 October 2017. The tax credit was initially paid to the Appellant in June 2018 but, following the opening of an enquiry into the claim in October 2018, HMRC issued a closure notice in September 2019 denying the claim and requiring the tax credit to be repaid.
In November 2020, the FTT issued comprehensive directions in relation to case proceedings which, in particular, required each party to send or deliver to the other party statements from all witnesses on whose evidence they intended to rely at the hearing setting out what that evidence will be (“witness statements”) no later than 11 December 2020 and to notify the Tribunal that they had done so.
The Appellant however did not send any witness statements to HMRC before the start of the hearing. Instead, one witness statement was sent in April 2021 to the FTT and a further three to the FTT just three days before the hearing in September 2021. Given this, HMRC submitted that the Appellant should not be permitted to introduce them as evidence at the hearing without making a prior formal application to do so. The Appellant made the application and HMRC objected.
Given the overriding objective of proceedings before the FTT, as outlined in the Tribunal Procedure Rules 2009 which require cases to be dealt with fairly and justly, the Judge advised that the difficulty posed by the application to admit the relevant witness evidence at the hearing was it was highly unlikely that the Appellant would be able to satisfy the burden of proving that the expenditure in this case satisfied the terms of the BIS Guidelines on R&D for tax purposes and would therefore necessarily limit the extent of his consideration of the case. That suggested that it would not be fair or just to the Appellant to deny it the opportunity to introduce the evidence in question. However, it would not be fair or just to the Respondents to allow the Appellant to introduce the evidence at the hearing without having given prior notice to that effect to the Respondents in advance of the hearing. In not doing so, the Appellant had prevented the Respondents from giving proper consideration to the relevant evidence and, critically, whether or not they wished to cross examine any or all of the witnesses.
On one obvious solution would have been to postpone the proceedings, in order to enable the process described in case proceedings to take place. However, he considered that course of action would also not be fair or just to the Respondents.
The Respondents had served their statement of case on the Appellant in February 2020, a considerable period of time before the hearing, and that statement of case had clearly set out both the concerns held by the Respondents in relation to the ability of the expenditure in question to fall within the ambit of the Guidelines and the fact that the onus was on the Appellant to discharge those concerns. It ought therefore to have been very clear to the Appellant for some considerable time before the hearing what issues it was going to have to address at the hearing, and the fact that the onus would be on it to satisfy the FTT in relation to those issues.
It ought also to have been very clear to the Appellant that satisfying the FTT in relation to those issues was going to require evidence from the Appellant in order to explain the underlying purpose of the R&D expenditure and demonstrate why
that expenditure related to work on an advance in science or technology involving the resolution of scientific or technological uncertainty.
The Judge concluded that the fair and just approach in this case would be to continue with the hearing but refuse to allow the witness evidence in question to be admitted. The absence of witness evidence however made it very difficult for the Judge to ascertain with any degree of precision the nature of the work carried out by [or on behalf of] the Appellant.
The Judge was able to refer to an R&D report prepared by the Appellant’s accountant and certain other evidence but found that it was wholly unclear from those documents whether the R&D work carried out involved the creation of new technology designed to resolve a scientific or technological uncertainty or was no more than a novel utilisation of existing technology or an adaptation of existing technology, and, in the latter case, whether that adaptation was readily deducible by a competent professional working in the field. He therefore dismissed the appeal.
Permission to appeal was granted.
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