Stage One Creative Services Limited v HMRC
Case number: TC09358
25 October 2024
GOL was a manufacturing and engineering company who deliver high-end projects for the creative industries, in this case they were developing a technology platform called ONBOARD. Their activities focused on an automated, AI-enabled onboarding solution, specifically the development of algorithms required in the processes of data normalisation and data latency. The testing of these solutions focused on identifying false negatives or false positives and creating a unique ‘Uniquing’ process in testing.
HMRC acknowledged that the system was impressive but wasn’t convinced it created an advance (para 6 of the guidelines). HMRC called on their specialist Chief Digital and Information Officer (CDIO) team and, after further challenge, kept the stance that no R&D had taken place.
The judge commented that they found Mr Cahill (the Owner) as an impressive witness and had the experience to be able to judge the projects. However, on the contrary, the FTT noted that Mr Umar for HMRC was in a difficult position as he lacked the scientific or technological knowledge needed even though he was very clearly a honest, straightforward and well intentioned witness.
HMRC argued that an appreciable improvement was not enough, and the project did not achieve an overall advance.
Before the courts discussed their thinking, they made the critical point that “Questions of whether the UK should have a regime for encouraging R&D spend and what that regime should be are for the government and Parliament to decide.” This was in support GOL and their adviser and widened their criticism of HMRC and their application of the scheme.
The FTT found that the burden of proof does remain with the business making a claim, but that the burden can shift through the process. This was set in Brady v Group Lotus plc [1987] STC 635 and the principle demonstrated in a tax case in Wood v Holden, [2006] EWCA Civ 26. In the latter, the judge stated, ‘it was not enough for the revenue to criticise the lack of evidence’. They also cited AHK Recruitment Limited v HMRC, [2020] UKFTT 232 (TC), and Flame Tree Publishing Limited v HMRC, [2024] UKFTT 349 (TC) to underline the importance of evidence.
The FTT made it very clear that the decision on whether an individual can be classed as a competent professional is to be considered on the individual merits of each person. In which case a university drop out, such as Sam Altman who founded OpenAI, could be considered competent in his field.
The FTT acknowledged and agreed with GOL that there had been a project and accepted that the project evolved over time – the fact there was an overall process with a defined objective mattered more.
They also agreed that an appreciable improvement is enough stating “we accept Mr Cahill’s submission that creating a new function, solving a real-world problem in a new and creative way using technology, is at least an indication that there has been an appreciable technological advance.”
Further, they confirmed that the use of open-source code is not in itself an indication that a development is routine or readily discernible.
The case law is now building with consistent conclusions. There is a willingness to support businesses. HMRC will need to continue to engage positively with businesses and if a business is, in good faith, presenting solid evidence, HMRC need to do more than just simply say no.
HMRC has found itself under immense pressure and the victims here seem to be their caseworkers and taxpayers.
Case number: TC09358
Case number: TC09332
Case number: TC09235