This was another R&D tax relief case that shows why it's vital to understand the rules as they are written in the legislation. This one shows how a going concern note in the accounts can have a significant impact on an ongoing R&D Tax claim.

What happened?

MW High Tech Projects UK Ltd (“MW”) claimed R&D tax credits under the RDEC scheme for both periods ending December 2017 and 2018. There was no dispute regarding the nature of MW’s operations in this case - the focus here was on the application of the going concern requirement.

To meet the going concern requirement, a company must be a going concern at the time they submit a claim. However, the requirement also contains a couple of nuanced points that are often missed and became the crux of this case.

As per the legislation, a company will be a going concern if its latest published accounts are prepared on a going concern basis and there is nothing in those accounts to suggest that they were prepared in this way due to an expectation of receiving R&D tax credits.

At the time, MW’s accounts for both 2017 and 2018 stated that they were not a going concern due to the expectation that the trade would either be transferred to another group member or that it would cease entirely - therefore failing the going concern requirement.

This, however, ceased to be the case by the time the accounts for 2019 were prepared, when it was decided that the Company would continue trading as it had done previously. As part of the 2019 accounts, MW included a prior year adjustment due to these being stated as a going concern, which assumed a retrospective impact for the two previous periods where this had not been the case.

HMRC rejected the 2017 claim, whilst the 2018 was accepted stating that the Company had failed to meet the going concern requirement for 2017. However, since the 2019 accounts were published prior to the submission of the 2018 claim, MW was deemed to be a going concern for that period. MW sought to appeal the rejection of the 2017 claim on the basis that a prior period adjustment would have meant that the 2017 and 2018 accounts were treated as a going concern.

MW attempted to appeal this on several fronts, including the fact that Parliament had, by this point, admitted that S104T contained an error. This being that where a trade was transferred within a group and that trading company was no longer a going concern due to the transfer, for the purposes of S104T, they would not be treated as a going concern at the time of the claim, therefore invalidating any claim made. But while new legislation in 2023 corrected this omission (as detailed below), it was still not retrospective.

Additionally, MW claimed that despite what was stated per accounting rules, MW was a going concern, that their directors were pressured into signing the accounts, and by the fact that HMRC had paid the 2018 claim, it had accepted that MW was a going concern for the 2017 claim.

The outcome

MW ultimately lost on all grounds of their appeal. The tribunal found that HMRC were correct in rejecting the claim for 2017, due to the accounts for 2017 and 2018 stating that MW were not a going concern, and as this had changed in the 2019 accounts, HMRC were correct to allow the 2018 claim.

Ultimately, if at the time of claiming the credit the company is not a going concern, it will not be entitled to receive the credit, as per S104S(2). However, if the company becomes a going concern on or before their last day on which an amendment of the tax return can be made, then the company would be entitled to the claim. This was not the case for MW as by the time the 2019 accounts had been published: they were outside of the period when an amendment could be made to the tax return.

Additionally, MW argued that the restatement of the accounts in 2019 to express that they were a going concern due to a change in strategy, would have affected the previous periods accounts. However, a restatement like this would not affect the published accounts at the date of the claim. Therefore, due to the wording of the legislation, it was not possible to consider this for the 2017 claim.

The goal of the going concern legislation in this area is to ensure that a company in receipt of the benefit will continue to trade and will use the economic benefit to further their development.

In this case, it may seem like the decision is not in the spirit of what is intended by R&D tax credits, given the fact that MW was going to continue to trade - via the transfer of the trade to another group company, or by the time the 2019 accounts were published. Therefore, following in the spirit of R&D credit, the tribunal might have allowed the claim on these grounds.

This shows that HMRC will follow the legislation to the word - although it has since admitted that there was an omission in the legislation for the transfer of trades with the inclusion of S104T(4A)(4B). At the time MW’s claim was made, HMRC followed the legislation correctly. The inclusion of this adjustment was not retrospective, therefore they acted correctly by rejecting the claim.

Case take away

The key point to take away from this case is the importance placed on s104S by HMRC. This means it is vital to be aware of the position of your most recent published accounts and their going concern position when making an R&D claim.

HMRC can and will rely on the most recent published accounts within the amendment period in respect to a claim. If these prove that you are a no longer a going concern, then HMRC can rightly reject the claim. However, this approach can also be beneficial in that these later accounts can also be used to prove that the requirement is met and that a claim should be accepted, where previously it would not have been.

If you need any help with R&D tax relief, please contact us.