B e f o r e :
TRIBUNAL JUDGE HARRIET MORGAN TRIBUNAL MEMBER MOHAMOOD FAROOQ ____________________
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Representation: For the Appellant: Mr Richard Brown of the appellant representing the appellant For the Respondents: Mr Sam Dingley, litigator of HM Revenue and Customs' Solicitor's Office ____________________
HTML VERSION OF DECISION ____________________
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Corporation tax – appeal against denial of research and development allowances/credits– appeal refused
Overview of the issues
The appellant appealed against decisions made by HMRC in closure notices issued to the appellant on 16 May 2023 under paragraph 32 of Schedule 18 to the Finance Act 1998 (" FA 1998 ") that £8,704.85 of tax is due in respect of its accounting periods ending on 31 July 2020 and 31 July 2021 (" the relevant periods "). The decisions are made on the basis that the appellant is not entitled to certain allowances and credits which it claimed on the basis that it had incurred qualifying expenditure on "research and development" (" R&D ") for the purposes of Chapter 2, of Part 13 of the Corporation Tax Act 2009 (" CTA 2009 ") (" the R&D provisions ").
It is common ground that HMRC followed the correct processes in issuing notices of enquiry under para 24(4) of schedule 18 FA 1998 into the appellant's corporation tax position in the relevant periods and, on conclusion of those enquiries, in making amendments to the appellant's corporation tax returns for the relevant periods on the issue of closure notices under para 32 Schedule 18 FA 1998.
In computing its corporation tax liability, under the R&D provisions, the appellant (1) made a claim under s 1044 CTA 2009 to an additional tax deduction of £37,813.00 and of £36,362.00 in respect of sums it claims are qualifying R&D expenditure in each of the relevant periods respectively, and (2) surrendered the entirety of its trading loss for the first relevant period resulting in a tax credit claimed of £5,482.89 and surrendered £15,176 of the loss for the second relevant period resulting in a tax credit claimed for that period of £2,200.52.
Section 1044 (1) provides that a company is entitled to corporation tax relief for an accounting period if it meets each of conditions A, C and D, namely (a) that the company is a small or medium-sized enterprise in the period (condition A in sub-s(2)), (b) the company carries on a trade in the period (condition C in sub-s (4)), and (c) "the company has qualifying Chapter 2 expenditure which is allowable as a deduction in calculating for corporation tax purposes the profits of the trade for the period" (condition D in sub-s (5)). It was common ground that conditions A and C are met. HMRC's view is that condition D has not been met. For this purpose:
HMRC's stance is that the expenditure to which the appellant's claims relate does not qualify as "in-house direct" R&D expenditure or as "contracted-out" R&D on the basis that it does not meet Condition B under s 1052 or Condition A under s 1053 because the appellant has not shown it is attributable to qualifying R&D. For this purpose:
The Guidelines contained the following main provisions of relevance:
The term "competent professional" used in the Guidelines is not defined in them. In Flame Tree Publishing v HMRC [2024] UKFTT 349 (TC) , the tribunal stated that, as HMRC submitted the meaning of competent professional:
In Gripple Ltd v HMRC [2010] EWHC 1609 (" Gripple "), at [12], the High Court outlined the proper approach to the previous version of the current Guidelines.
There was no dispute that metallurgy is a field of science "built on atomic, chemical, and physical principles". In short, HMRC's view is that the appellant's work, as carried out in the relevant periods, does not advance metallurgy, but instead education and so does not qualify as R&D within the meaning of the Guidelines. The appellant's detailed submissions are set out below. HMRC further contend that, if that is not correct, the burden is on the appellant to show that the costs claimed are attributable to relevant R&D but the appellant has failed to do so.
For all the reasons set out below, we have concluded that the appellant's activities in the relevant periods did not constitute R&D within the meaning of the Guidelines. Therefore, we have not found it necessary to consider the costs in question.
Evidence and facts
We have found the facts on the basis of the documents in the bundles and the evidence of Mr Brown and Mr Mike Bacon who were cross-examined at the hearing. We found them both to be honest and credible and plainly passionate about the teaching of metallurgy.
The appellant stated that there has not been a single educational institution in the UK since 2016 that offers formal qualifications in metallurgical and material science at pre-university level, with also part-time and remote learning options.
The appellant was incorporated in 2015 after the closure of the metallurgy and materials department at Bradford University with Mr Brown as its managing director. Mr Brown set the appellant up to continue with his passion for educating part time students who spend time in a work place in this field. The appellant offers training and practical sessions in this field of a type which during the relevant periods were not available elsewhere in the UK. There has not been a single educational institution in the UK since 2016 that offers formal qualifications in metallurgical and material science at pre-university level, with also part-time and remote learning options. Students who take part in the appellant's courses can gain an industry recognised qualification. The appellant sometimes acts in partnership with others such as the University of Wolverhampton via the Institute of Cast Metal Engineers which allows it to offer practical training within an industry leading controlled and safe environment. This takes place either by limited face to face learning or via online webinars that are followed up by an e-learning project using the appellant's innovative Moodle platform.
In a report produced for the appellant, the relevant activity which it is asserted constitutes R&D within the meaning of the Guidelines is identified as the development of an e-learning platform via Moodle and the factors highlighted include the following:
On the basis of the evidence from the witnesses and in the bundles, we accept the following:
The appellant provided an overview of its courses as follows:
The appellant summarised the feedback received by course participants on the challenges they faced as follows:
The appellant provided two "case studies" to provide more detailed insights into the curriculum development, focusing on practical metallography, metallurgical investigation techniques, and failure analysis:
The appellant gave further details of the first "case study" as follows:
The appellant said that for this course (1) the appellant "created its own Aims and Objectives (Introduction to Practical Metallography: Eutectic (liquid to liquid transformations - two phase )" and its own presentation style, (2) the appellant created the teaching and learning and used existing scientific principles to do so, (3) it used "thermal equilibrium diagrams and " tie diagrams" and created its own "Metallurgical Microsections" and converted them into e-photographs and created "the macro and microsections in directions – longitudinal and transfers", (4) the course was supported by Zoom video conference call, and (5) there was evaluation by ECMS and the appellant's evaluation forms.
The appellant gave the following further details of the second "case study":
Mr Mike Bacon gave the following evidence:
The appellant provided written comments it had received from three industry experts in response to questions it asked which it considered supports its case. The first question put to Mr Colin Whorton Prof MICME EngTech - National Foundry Training Centre Manager was:
Mr Whorton replied that in his time as an employee of the University of Wolverhampton (Business Development Manager) and with 30 years' experience in the engineering sector he has seen a huge lack of provision for the support of metallurgy training and experience in the workplace. In 2019 he first joined the University due to the lack of training in the sector and:
The second question posed to Mr Whorton was:
Mr Whorton's response to the second question is as follows:
The third question was:
Mr Whorton replied as follows:
Finally the appellant asked this fourth question:
Mr Whorton replied:
The appellant asked the same questions of Mr Martin Durkan - Managing Director of Paint Inspections Limited, Certified Level 3 Instructor, member of Industrial Employers Advisory Board.
Mr Durkan replied to the first question as follows:
Mr Durkan said this as regards the second question:
As regards question 3, Mr Durkan's response was as follows:
As regards question 4:
Finally the appellant asked the same questions of Mr Steve Chambers FdEng MInstNDT, General Manager at Morgan-Ward (NDT).
As regards question 1, Mr Chambers said this:
On question two, Mr Chambers said this:
Mr Chambers reply to question 3 is as follows:
On question 4, Mr Chambers said this:
Submissions and conclusion
HMRC's submissions are reflected in our conclusions as set out below. For the appellant, Mr Brown made the following main submissions which he considered are supported by the evidence provided:
In our view, as HMRC submitted, the appellant has not provided evidence that its expenditure related to qualifying R&D:
We explained to Mr Brown at the hearing that it is not the role of the tribunal to consider the appellant's complaints as regards HMRC's conduct in relation to the appellant whether as part of the alternative dispute resolution procedure or otherwise.
Conclusion
For all the reasons set out above, the appeal is dismissed.
This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.