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FTT Rejects Appeal in Research and Development Tax Relief Case

Wednesday 30th September 2026

The FTT has recently rejected taxpayer’s appeals in a case involving claims to research and development tax relief.

In Environmental Services Limited v HMRC [2026] UKFTT 01301, the taxpayer appealed against HMRC’s decision to issue closure notices for the accounting periods ended 31 July 2020 and 31 July 2021. The closure notices amended ESL’s company tax returns to disallow the claims made to R&D enhanced expenditure, on the grounds ESL was not entitled to R&D tax credits for these periods.

The FTT had to consider two issues, being whether the activity carried on by ESL qualified as R&D for tax purposes and, if it did, the extent to which ESL’s expenditure qualified for tax relief. Both parties accepted that ESL had the burden of proof that the activity was R&D for tax purposes, that the expenditure qualified for relief, and that the standard of proof was on the balance of probabilities.

The FTT had to consider a hearing bundle of 519 pages, an authorities bundle of 266 pages, a ESL skeleton of 4 pages and a HMRC skeleton of 24 pages.  Two employees of ESL gave witness evidence and the FTT found both to be intelligent, articulate and truthful, and their evidence was unchallenged by HMRC.

ESL’s business was the collection and transport of various kinds of waste to a suitable waste disposal site. ESL did not process the waste itself.  ESL’s premises included a full manufacturing workshop with welding materials and fabricating materials. The workshop was used for the maintenance of vehicles and equipment, and also used for the work needed for the two projects under dispute.

Prior to 2016 ESL was able to collect mixed waste and deliver it to any waste disposal site. Due to regulation changes in 2016, ESL became required to take mixed waste to a more limited number of waste disposal sites, according to n the type of waste.

In July 2019, ESL won a contract to dispose of waste from the upgrade of the M1 motorway to a smart motorway. Significant amounts of waste (clay, soil and stone) were generated by horizontal drilling under the existing motorway. The motorway was shut at night for a short time to allow ESL to collect the waste. This meant that there was significant time pressure for ESL to collect the waste, given waste disposal sites were closed at night.

Whilst the type of work ESL undertook had not changed, the combination of the changes in regulation which restricted the sites waste could be taken to and the time pressure due to the need to shut the M1 motorway whilst the waste was being collected drove ESL to look at innovations to improve their business.

The R&D claims resulted from two interlinked projects carried out in 2020 and 2021 with R&D reports prepared in house by ESL. The R&D reports stated that it had been difficult to describe all of the scientific and technical methods carried out during the projects due to the directors of ESL being “practical people”.

The 2020 R&D report stated that the aim of the project was to find the most efficient way to collect waste and keep solids and liquids separate or mixed depending upon the type of waste and what would be acceptable at the relevant waste disposal site. The project involved researching a range of different combination of pumps, pipes and nozzles and finding the correct combination to implement the correct method. ESL considered the whole market of variables in its research using its fabrication workshop to create unique and niche products to enhance performance. The result of this research was the development of a number of products, including specialised nozzles for filtration which allowed for the loading and unloading of different waste and chemicals, pump enhancements to increase agitation and reduce viscosity of waste, and sludge reaction units to enable onsite filtration.

The 2021 project involved making adjustments to the “Hulk”, a waste collection vehicle designed to be quicker at loading waste. The commercial driver for this was to enable ESL to complete more waste pickups in a single night and the R&D report stated the purpose of the project was to investigate a method of agitation to keep solids and liquids separate whilst in transport.

ESL attempted to achieve this aim by purchasing parts for their vehicles including tipping arms, pump fittings and hoses to keep the mixing to minimum whilst in transit. ESL would then adapt the system to different types of waste and factoring extraction methods and chemicals used, with each collection requiring trial and error to perfect the process.

The Tribunal heard that there was no written plan or targets to meet regarding the R&D activities and that a key employee of ESL responsible for the company’s plans for R&D kept them “inside his head”.

ESL advised that both projects were successful but no steps were taken to protect the technology developed by the projects or to monetise it, although ESL was looking at patenting the technology. When ESL shared the suction technology it had developed for the Hulk vehicle with a manufacturer, it appeared that manufacturer had replicated that technology such that other businesses were able to benefit from it. ESL has since been reticent to patent the technology developed by the projects or to show them to a manufacturer as they wish to keep these developments confidential.

ESL advised that some online research had been carried out and it had spoken to others in the industry to see what solutions or products were available commercially. However, a lot of the solutions on the market were considered unsuitable for ESL being off site or were not appropriate for waste transported by road.

The essence of ESL’s case was that the two projects were not routine waste management activities. They involved experimentation to solve technological problems concerning the handling and transportation of complex waste streams. ESL submitted that both projects involved genuine technological uncertainty, in that the projects required it to overcome uncertainties that could not be resolved through routine industry knowledge or existing methods. The work was systematic and experimental, rather than a routine business activity and the witnesses were competent professionals. Limited contemporaneous evidence should not be fatal to the appeal.

HMRC however maintained that neither project involved R&D that met the criteria for tax relief. In particular, ESL had failed to show:

  • that the projects were started with the intention to make advance.
  • that the projects were conducted according to set plan which was intended to achieve an advance by addressing scientific or technological uncertainties.
  • what the technological uncertainties that the projects sought to address were.
  • what the base line level of knowledge in relevant field was.

In addition, HMRC submitted that ESL had failed to demonstrate that the expenditure claimed was allowable and related to the two projects.

After reviewing both sides’ arguments, the FTT accepted that ESL undertook genuine work to improve its business operations and the witnesses were competent professionals with extensive practical expertise. However, ESL had not established on the balance of probabilities that the activities relied upon constituted R&D within the meaning of the BEIS Guidelines. ESL had not established the amount of qualifying expenditure attributable to those activities.

The FTT’s commented that its conclusion was not based on the absence of contemporaneous records but the absence of contemporaneous documentation limited its ability to evaluate the precise activities undertaken, the uncertainties said to arise and the expenditure said to be attributable to them.

The FTT held the statutory requirements had not been met and dismissed the appeal.

 

If you would like more information on the above decision, please contact Keith Rushen on 0044 (0) 207 486 2378.

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