R&D costs must be supported by evidence
A company claimed R&D tax credits on losses of £398,325 but failed to provide supporting evidence for the expenditure. HMRC refused the claim and the FTT agreed.
This is a cautionary tale of the need to keep and maintain accurate records of expenses and to record the technical details of R&D activities.
Teksolutions-Inc Ltd claimed R&D tax credits in respect of losses totalling £398,325 for two periods to 20 October 2015. After an investigation, HMRC issued a closure notice reducing the trading losses for each of the two periods to nil.
Teksolutions appealed (TC07456) and HMRC argued that if the appeal was dismissed, there would be no entitlement to claim an R&D tax credit, as there would be no qualifying expenditure for the purposes of CTA 2009, s 1044.
Teksolutions had provided lists of purported R&D expenses, but no documentary support. It wasn’t clear whether those expenses had been included in the tax returns that had been filed.
The company said that many of the recorded expenses, such as wages, subcontractor payments, accountancy and audit costs, had not yet been paid. Therefore, it was not possible to provide any evidence for them.
Teksolutions must have been exceptionally unlucky because it suggested that apparently through a twist of fate, not only had the eBay account, which was supposedly used to make purchases of relevant equipment, been hacked and the entirety of its purchasing history deleted. But simultaneously, all of the company’s other suppliers had either relocated or gone out of business!
Although it put forward no evidence of the expenditure, Teksolutions did provide purported project summaries and a slide show and insisted that the R&D relief claim should be allowed because it “could not have conducted the extensive research that it had” without incurring the claimed expenditure.
But in response to queries about the nature of those R&D activities, the company’s representative responded that he didn’t believe it was his job to explain to HMRC “how science works”.
Despite the absence of any tangible evidence of expenses actually incurred, Teksolutions was adamant that it should receive a provisional payment of the claimed R&D credit.
HMRC went to generous lengths to accommodate the company, making numerous requests for information and postponed penalties to allow more time for it to comply with the notice. HRMC wrote to the taxpayer explaining that “not only must the expenditure be qualifying; it must also be paid”.
During the correspondence, HMRC explained that it was able to use formal powers to gain access to records from suppliers on behalf of the taxpayer. The results of which eventually showed that the eBay account in question only recorded purchases of a personal nature, such as a child’s bike, a pair of trainers and a games console.
The legal position
Under FA 1998, Sch 18 para 21, companies are required to keep and preserve records for six years after the end of each period for which they are required to deliver a company tax return.
Furthermore, CTA 2009, part 13 states what is required of a company before it is entitled to R&D corporation tax relief. The company must have qualifying expenditure that is allowable as a deduction in calculating corporation tax for the purposes of the trade for the relevant period. In the context of wages and subcontractor payments that remain unpaid nine months after the year end, CTA 2009, s 1288 holds that, “No deduction is allowed for the renumeration if it is not paid.”
Teksolution’s appeal was dismissed as very little of the claimed expenditure had been established. When questioned about the laboratory work said to have been conducted, the company's representative was extremely vague, stating that it was "all very complicated". The FTT concluded that the purported R&D work product (graphs and equations set out in a slide show presentation) did not satisfy it that the claimed expenses had been incurred.
It couldn’t be proven that the few expenses which were evidenced were incurred wholly and exclusively for the purpose of the trade as required by CTA 2009, s 54. Therefore, the trading losses on the returns in question were reduced to nil and consequently there could be no claim for an R&D credit because there was no qualifying expenditure.
HMRC levied a penalty of £25,791 against Teksolutions because, it contended, the false claiming of expenses was “deliberate and prompted”.
This is an extreme case, perhaps, but a worthwhile reminder to all taxpayers. A successful R&D relief claim should always ensure that the conditions have been met and it is supported by robust, yet accessible, technical narrative explaining traceable costs on qualifying R&D activities.
Heeding this advice, ideally with assistance from an R&D tax relief specialist, will make the receipt of an R&D repayment far more likely.
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Keri Hopkins is a consultant at tax incentives specialists, Gateley Capitus. Previously she has worked at a major accountancy firm and a boutique consultancy. She is an accountant and specialises in research & development and capital allowances. Email: [email protected]...