An area of tax that is key to making an RDEC (Research and Development Expenditure Credit) claim is that the UK Ltd co is a trading entity. So what happens if this fundamental point is not as clear cut as it should be?
The Taxes Acts give little guidance on the meaning of the word ‘trade’. S989 ITA 2007 and S1119 CTA 2010 say that ‘trade’ includes any ‘venture in the nature of trade’.
There is no further statutory help. As a result, the Courts have established for themselves what amounts to a ‘trade’, or ‘trading’, and their decisions provide guidance when the point is in dispute.
‘Broadly, ‘trade’ can be taken to refer to operations of a commercial kind by which the trader provides to customers for reward some kind of goods or services. The extension of the definition to ‘ventures in the nature of trade’ allows for the inclusion of isolated or speculative transactions, although not all such transactions will be within the definition.’
Before the enactment of ITA 2007 and CTA2010, the equivalent definition was in S832(1) Income and Corporation Taxes Act 1988. It said that ’trade includes every trade, manufacture, adventure or concern in the nature of trade’. The decided cases on the meaning of trade deal with this earlier definition, but the principles established by them remain relevant to the new wording.
With these loose definitions, hallmarks or badges of trade are often what the Courts will look at in the event of a dispute. They need to be considered on a collective basis and no one factor will necessarily create a clear conclusion.
Key areas for businesses looking to claim R&D tend to be:
There are also situations where a pre revenue business can be considered trading if they can satisfy that there is an intention or commitment to trade in a reasonable time period. To be considered in this bracket, there must be solid evidence and a clear commitment that a trade will take place. Examples of this can include a contract to provide the goods once it is market ready, board level minutes that demonstrate a clear plan to sell that meets the hallmarks of trade and clear evidence that it would be capable of being traded for commercial purposes (price, demand, etc.)
There is a concern by HMRC that some businesses opt to say they are trading so they can benefit from preferred tax treatment, which includes making an R&D tax relief claim. Whilst pre-trading companies can make R&D claims, they cannot receive the benefit until the company has started to trade. They can accrue 7 years prior to the first year of trade and if they fall under the ERIS (Enhanced R&D Intensive Support) scheme, they can make an election under s1045-1048 that allows deemed trading loss pre-trade and a payable credit.
As R&D tax relief is intended to drive innovation in both new companies looking to launch new products and larger businesses who may have an entity in a group structure that may be where they incubate new product development or high-risk projects. Consideration of whether they meet the trade condition is essential. Recent case law, notably Boulting v HMRC that, whilst not R&D tax relief related, gives strong guidance on what is expected to distinguish between trading and not. This includes clear commercial rationale, contemporaneous documentation and Board minutes demonstrating the intention. In addition, when the company is part of a group being laser focussed on which entity in the group is the right entity to make the claim and that it considers higher risk areas such as a mere support or investment function.
