Stage One Creative Services Limited v HMRC
Case number: TC09358
25 October 2024
AHK Recruitment Limited (AHK) sought appeal after a closure notice was issued in respect of their R&D tax relief claim.
AHK is a recruitment business that developed a software solution around predictive behavioural assessments.
AHK were represented by their advisors Optimal Compliance (Optimal) and whilst the FTT did not doubt their honestly, they said their evidence was less than satisfactory as they were not contemporaneously involved in the projects.
HMRC opened a compliance check in respect of the ‘Individual Behaviour Assessment’ project with concerns that it did not meet the definition for R&D which specially excludes works in the arts, humanities and social sciences. The agent, Azure Financial Services (Azure), responded to say that the social science element had been completed in previous years and the focus of the R&D project was the development of a software application indicating a SaaS type solution.
HMRC requested more detail about the project including details of the competent professional, the advance and the breakdown of the costs involved. After numerous extensions and delays over a 3-month period, Azure provided the information from Optimal that had been requested. However the information provided was not sufficient and HMRC asked again.
From October 2016 through to February 2017, no information was received and when HMRC followed up, Azure was no longer acting for AKH and contact with Optimal was permitted.
In May 2017 a meeting was held between HMRC, AHK and Optimal and an outcome agreed that the competent professional would submit his reporting regarding the R&D activity related to the project with a deadline of 9 June 2017.
On 4 September 2017, Optimal provided the information and the project named ‘Individual Behaviour Assessment Automation’ and Gareth Jones as the competent professional.
At the start of October 2017, HMRC acknowledged that the claim was made in good faith, but the conclusion that the project did not qualify remained.
Between October 2017 and October 2018, there were various communications between HMRC and Optimal but they made no material impact on the decision. Mr Arrowsmith (HMRC) summarised his position as follows “The claim for R&D tax relief is being rejected on the grounds that there has not been any evidence provided by the company to suggest that they have advanced the technological field of IT.” AKH appealed.
The FTT decided that AHK had failed to prove that they undertook qualifying R&D and in the case that there had been R&D they had been unable to prove the costs that were included.
Whilst both agents of Optimal had provided evidence throughout, they could not be deemed as competent professionals as they were not directly involved so could not prove if the advance was readily deducible.
There wasn’t a credible argument that Mr Jones was a competent professional, merely that he was experienced and that was not well articulated or evidenced through external sources such as journals and industry publications.
In point 73 and 75 the tribunal commented “We find it remarkable that the Appellant did not provide evidence from someone that was contemporaneously involved in the project (such as Mr Jones or Mr Philby) and/or from someone with relevant expertise who, having reviewed records of the project, might have been able to address the issues.”
“Again, we find it remarkable that the Appellant did not provide evidence from someone contemporaneously involved in the project (or who had subsequently conducted a review of the Appellant’s records) who could speak with authority as to the nature of the work undertaken by Evensys and the Appellant’s own staff, to the descriptions of work provided on the Evensys invoices, and to whether Evensys provided other (non-project related) services to the Appellant during the relevant accounting periods. “
The appeal was dismissed.
To use the tribunals phrase, we find it ‘remarkable’ that this case was taken to FTT. Basic, hygiene factors in pulling together an R&D tax relief claim were simply missed. The introduction of the Additional Information Form may stop this type of situation happening again and the reality of R&D tax relief being technically led, with good solid evidence should drive better outcomes for all parties.
Case number: TC09358
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Case number: TC09235