Stage One Creative Services Limited v HMRC
Case number: TC09358
25 October 2024
Gripple claimed R&D tax relief under the SME scheme and although the R&D activities were not challenged, a cost to an associated company, Loadhog, was.
The costs in question were that of Mr Hugh Facey, who was also the founder and controlling shareholder of Gripple. Mr Facey divided his time between Gripple and Loadhog and agreed that each business should bear 50% of his salary costs, with Loadhog paying 100% and then 50% being recharged to Gripple.
The General Commission discussed the appeal from Gripple and accepted HMRC’s submission that the relevant sums paid by Gripple to Loadhog were not staffing costs withing the meaning of s20 para 5.
HMRC stated, and the Commissioner reluctantly agreed, that Mr Facey was an externally provided worker and, because he was a director, could not claim an R&D allowance. They equally considered if he had a role as a subcontractor but concluded the case did not satisfy those requirements either.
The Commissioner commented that if Loadhog had merely been a payment or salary agent, then R&D tax relief would have been available.
Before reaching his judgment, the Judge made clear that he did not accept Gripple’s submission of a general intent and generous construction of the scheme on the basis that “the provisions form a detailed and meticulously drafted code, with a series of defined terms and composite expressions, and a large number of carefully delineated conditions, all of which have to be satisfied if the relief is to be available. The schedule runs to 26 paragraphs, and occupies ten pages in Tolley’s Yellow Tax Handbook for 2005/06. … a detailed and prescriptive code of this nature leaves little room for a purposive construction, and there is no substitute for going through the detailed conditions, one by one, to see if, on a fair reading, they are satisfied. … the relief is a generous one… there will be nothing to prevent the company from deducting its actual R&D expenditure in full in the computation of its trading profits, provided only that the normal “wholly and exclusively” test is satisfied.”
The Judge found that he was unable to agree to Gripple’s submission that as Gripple and Loadhog acted as one commercial entity in trying to achieve the aims of the project, it goes against the principle that is commonplace in UK tax law that companies in a group, however closely related, are normally to be treated as separate entities. Indeed, it is precisely for this reason that special provision must be made, for example by the provision of group or consortium relief, to enable the tax treatment of a group to correspond more closely with the underlying commercial structure.
The judge said that it was unfortunate and that there was no attempt to create a tax advantage in the structure, but that choice inadvertently limited the amount of R&D tax relief that could be claimed.
The Judge, therefore dismissed the appeal.
What Mr Justice Henderson discussed in Gripple is a common feature in most R&D First-tier Tribunal hearings. Businesses, and their advisors, need to have a firm understanding of the definitions that are unlikely to benefit from a wider interpretation and therefore must be taken as written.
We are strong believers that the intent of the R&D tax relief schemes will always prevail. Whilst the subject of R&D remains almost impossible to fully define, there are some core tests that are fully defined and need to be fully adhered to.
We must continue to actively challenge the grey areas of the legislation. Where the wording creates a detriment that impacts the payback of the scheme businesses should be willing to take the challenge all the way for the wider improvement of the R&D schemes.
Case number: TC09358
Case number: TC09332
Case number: TC09235