Stage One Creative Services Limited v HMRC
Case number: TC09358
25 October 2024
This was not the first time Hadee has been at the FTT and had previously been subject to enquiry for the 2010 accounting period when they faced a COP9 Civil Investigation into cases of Suspected Serious Fraud and went to tribunal to seek a closure notice. This was accepted by the judge (15/12/2017).
Hadee then appealed for the claims made in the 2009 and 20210 accounting periods.
The R&D tax relief claim was made under the SME scheme claiming enhanced expenditure of 75% covering 7 projects as well as 1 ‘other’ project. The agent, MSC, provided some limited working papers to support in the case but they did not hold primary records to help substantiate the claim. MSC did not continue to work for the client through the appeal citing that they had limited knowledge of the process.
Mr Lowe then provided explanations to the court on each of the projects listed except for the ‘other’ projects as he did not have sufficient evidence to substantiate that claim. HMRC opened an enquiry with a number of detailed questions regarding the claim and the financial costs associated with it.
HMRC granted a Sch36 notice to Hadee, MSC and Sheffield Forgemaster’s (a client) to secure the information they had requested to further their enquiry. They also sought further invoices from Hadee to understand the relationship and services being purchased by clients.
The closure notice issued on 10 Jan 2018 stated that Hadee had :
The tribunal heard further details from HMRC about the specifics of the claims and many discrepancies identified throughout the process. Hadee looked to counter these details with a key theme of the strict and limited way HMRC had approached the case, meaning it would be difficult to substantiate any claim for R&D tax release.
Mr Firth, representing Hadee, made the point that Mr Lowe was a competent professional and through the disclosure process, the burden of proof had shifted to HMRC. He considered that some matters around the financial calculations and attributable costs may have been made in error and should be reviewed.
The tribunal did not accept that the burden of proof had shifted as the evidence given by Mr Lowe of Hadee ‘was unreliable, vague and at times inconsistent to the extent that we could not be satisfied on the material before us’.
The tribunal confirmed the use of the normal meaning of the work project and a plan, scheme or planned undertaking is required to support the ‘boundaries’ of a project highlighted in the BIS guidelines (now DSIT) and the narrow approach as set down in Gripple Ltd v Revenue and Customs Commissioners [2010] EWHC 1609 (Ch) at [12]: should be followed.
When considering subcontracting the judge focused on the IP conditions, concluding that if the IP is vested with the company, it is fair to assume that the R&D also remains within the company.
The tribunal treated the MSC report with caution because of the lack of evidence associated to it.
The FTT found that, apart from one project (marine gears), Hadee failed to meet the legislative test as there was no plan and the company couldn’t show a scientific or technological uncertainty.
They also added that the evidence, numbers, payments were vague and inconsistent throughout and went further to say even if they are wrong, the evidence relating to the expenditure was wholly inadequate.
The marine gears project was allowed based on oral evidence and that a project had been formed, but the costs attributable are likely to be a fraction of those originally claimed so left it to HMRC and Hadee to use best their endeavours to reach agreement on the correct value.
Agents have a big role to play. Their robust processes and the depth of an advisor’s challenge is in the interest of both the taxpayer and, ultimately, the integrity of the scheme.
Case number: TC09358
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