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R&D claim a no-go because of going-concern status

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An engineering company’s research and development expenditure credit claim was deemed not to be eligible because its going-concern status did not meet requirements.

14th Feb 2024
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In a £1.9m research and development expenditure credit (RDEC) case, MW High Tech Projects had their appeal denied and their claim “extinguished” because the tribunal ruled that the appellant’s latest published accounts were not prepared on a “going concern” basis.

Going-concern status plays a pivotal role in determining whether a company is eligible for relief, indicating that there is a reasonable assumption that they will continue trading and fulfilling financial obligations.

The Corporation Tax Act of 2009 states that a company is a going concern if:

  • the latest published accounts show that the company is a going concern 
  • or the company becomes a going concern by the last day on which it could amend its tax return.

Additionally, the directors’ report, auditors’ report (if there is one) and the notes to the accounts generally contain relevant information regarding future trading and financial prospects. 

Going concern 

MW High Tech Projects UK Limited (MW) is an engineering and construction company. In 2017, it were instructed by its parent company, M+W Group GmbH, to cease all new tendering activities. This coincided with a reorganisation of the parent company and the creation of a newly incorporated subsidiary, Exyte UK. The parent company planned to transfer the trade opportunities currently in MW’s sales funnel to another group subsidiary.

MW High Tech Projects was in a sticky financial situation in 2017. It reported a loss before tax of over £135m and a negative balance sheet with £197m of net liabilities. Its position as of 30 December 2018 was not improved.

As a result, the information in the directors’ report and the auditors’ report indicated that the company did not meet the going-concern criteria, and both sets of financial statements for December 2017 and December 2018 were not prepared on a going-concern basis.

MW submitted its corporation tax return, including the RDEC claim, for the year ended 30 December 2017 to HMRC after the relevant tax period’s deadline. It then filed accounts for the same period to Companies House in April 2019. The RDEC claim and subsequent appeal were rejected, with MW deemed to have failed the going-concern conditions set out in the Corporation Tax Act 2009.

However, the accounts for 2019 were prepared on a going-concern basis, and the wording indicated that the accounts for 2017 and 2018 should have the same status.

Retrospective application

The appellant tried to argue that the 2019 accounts constituted a retrospective application of changes to correct the position, referencing information outlined in the Treasury report in November 2021 and enacted by the Finance Act 2023. They relied on this retrospective change throughout the hearing, and it’s possible that the claimant realised the claim was at risk and tried to mitigate that risk by producing the accounts for 2019.

MW further also asserted that the transfer of trade between the appellant and Exyte UK or Exyte Northern Europe satisfied the “relevant group transfer” definition. This would make them eligible for relief and support the validity of their claim.

Unfortunately for the appellant, the legislation clearly states that these amendments are not considered retrospective. They applied to accounting periods starting from 1 April 2023, and the tribunal could not rule otherwise. 

Submitting late corporation tax returns

The appellant argued that HMRC had delayed opening the enquiry, thereby forcing them into a position of “financial disadvantage”. They also stated that HMRC’s actions were in breach of its “duty of care” and that Extra Statutory Concession B41 should apply.

However, the 2017 CT return, which included the RDEC claim, was submitted late. This extended HMRC’s deadline to open an enquiry to 30 April 2020. HMRC opened the enquiry through written correspondence on 11 December 2019 which was firmly within the enquiry window.

On consideration of these facts the tribunal found that it had no jurisdiction to decide submissions of this type. Instead, whether HMRC acted in an improper or unfair manner is a matter for judicial review or a complaint.

Implications for advisers

The outcome of the tribunal presents some interesting takeaways for those working in research and development (R&D) tax relief. At the time of submitting an R&D claim, advisers should check what the latest published accounts say about the going-concern position of the claimant company. It’s important to remember that, depending on the claim submission date, the latest published accounts could be for a later accounting period. 

Additionally, HMRC may challenge the going-concern status more in the future. When preparing a strong R&D claim, a company’s business plan could be a good source of evidence to support the going-concern status. It can also shed light on how R&D advancements contribute to the company’s resources, goals, and profitability.

Replies (3)

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By Rob Swan
15th Feb 2024 11:38

There goes UK innovation...

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Replying to Rob Swan:
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By FactChecker
15th Feb 2024 16:55

... are you suggesting that the UK taxpayer should continue to 'invest' in a business that is deemed not to be a going concern?

If the degree of innovation and/or potential return are sufficiently high, then surely other investors in the private sector will step up (or the state could even take a direct stake)? Otherwise it can end up looking like a simple reward for failure.

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Replying to FactChecker:
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By Rob Swan
16th Feb 2024 12:02

Thanks FactChecker.
My point is that innovative R&D is very often too risky for many investors, who frequently look for 'rapid' returns and may 'pull the plug' if they get impatient. I've personally experienced good innovation destroyed in this way by poor or impatient VCs. If those doing the R&D have sufficient faith/reson to continue, then I believe they shold be encouraged to do so - most people do not deliberately pursue hard work if they do not see a return, and I think (in most cases) that is a good enough basis to encourage them. Sometimes the work or wait is just too long for 'investors'. The British are extremely inventive and, if we are to give ourselves any hope of a better future, I believe we should do all we can to encourage innovation.

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