Introduction
A First Tier Tribunal case for R&D was published at the end of 2024, with HMRC winning against the appellant, Strictly Money Ltd. Strictly Money Ltd (“the Company”) was in the early stages of an entrepreneurial, technology-based business idea consisting of a software tool for the investment industry. The Company looked to gain additional relief on their expenditure that related to their Research and Development (R&D) under s1044 CTA 2009 which would provide them an 130% additional deduction on the R&D costs incurred for the accounting period 1 June 2016 to 31 May 2017.
Through this appeal, the Judge had two main points to be considered which would either allow or dismiss the appeal.
- Firstly, whether the Company was considered trading and met the requirements of s1044 and eligible for the R&D scheme.
- Secondly, whether the expenditure on subcontractors qualified for R&D and could be allowable as deduction for the purposes of the Company’s trade.
The Underlying Issues
1. Trading Status
A company’s trading status is important with R&D, as the company needs to be conducting general business activities, trading or receiving income. If not, the company is considered dormant. The need to be trading is important because the R&D claim is tax relief available is for trading companies if the company is not trading, it is not chargeable for tax and therefore cannot be eligible for tax relief. The evidence the Company presented to prove their trading status included a statement of comprehensive income detailing revenue of £30,000, administrative expenses just under £2 million and a balance sheet with net liabilities of £624,000. Additionally, they provided proposal documents and an executive summary which described the Company and their goal.
A further look into the revenue showed that the income was received for online platform and brand development consulting services. As the goal of the Company was to develop a blockchain technology platform for investment, the income received was not in relation to the main business activity, which in this case needed to be trading. Interestingly during the period in question, the Company did not possess a business bank account, meaning they were not receiving revenue related to the trade and had no means to do so.
The proposal documents provided a description of the work the Company sought to undertake. The first document which was never progressed or finalised stated that the Company was pre-revenue, newly founded and in some cases yet to be founded but a “well-capitalised start-up business based in the Isle of Man” in the “design and development phase”. The statements such as those regarding its funding status and area of operation were found to be aspirational rather than realistic. The second document was a 20-page executive summary which also reflected similar aspirational language of what the Company hoped to do rather than what it had done. In short there was no evidence of the Company engaging in any trading activity related to their main business activity, which was deemed to being not qualifying to claim R&D.
This became the first reason the Judge dismissed the appeal as the business itself was not near commercial viability and as such was not trading.
2. Qualifying R&D Expenditure – £2,039,000
Secondly, to claim R&D expenditure, the work, if contracted out to a third party, would need to have actually been done. There was alleged work undertaken by Mr. Falk which was evidenced and presented in the form of an oral witness statement by Mr. Ashurst who was representing the Company.
It is important to note that Mr Ashurst did not work for the Company at the time the work was contracted out and had not met Mr. Falk. Although the expenditure being claimed was for work contracted out to a third party, there were no actual documents or physical evidence of work being done. The only evidence of “work” was from the parties giving verbal confirmation to Mr. Ashurst of the work that was apparently completed.
Ms Prendergast and Mr. Falk, who were the parties to the contract, never appeared at the hearing and even Mr. Falk refused to provide a witness statement of the work he had undertaken during the period for the Company. The only documentation which related to Mr. Falk’s involvement with the Company during the period was a legal document for a loan and its conversion arrangements, which was not related to any potential R&D or any work done for the Company related to its main activity. The Judge interpretated that Mr Falk carried out:
“No meaningful work for the appellant company during the period”
Therefore, the expenditure associated with the work undertaken was not qualifying for R&D. Again, it was noted that his work had nothing to do with business purpose, so the fact that this was dismissed creates clear guidance for companies in the future.
In relation to the expenditure (£39,000) for Burderop Bridge Ltd, this was “work done” by Mr. Ashurst as a third party before joining the Company. This was work which related to main business activity. Evidence of the qualifying nature of the work was via emails from an individual described to have “long experience as a technology consultant” as well as another individual described as a “fellow of the Blockchain centre at a leading UK university”. These individuals described the “work done” as potentially qualifying as an advance within the field of blockchain technologies. There was however no actual development evidenced beyond descriptions of how the platform should function.
Although the “work done” by Burderop Bridge related to the main business activity and could have been qualifying if the work was actually undertaken, the argument to allow the deduction could not be held. This was because apart from the lack of evidence of work done, the main activity of the business did not constitute trading and was not eligible for tax relief. It was unclear where the money spent on hiring the subcontractors went and what was achieved over the period.
Decision
In conclusion, the Company attempted to claim for an additional deduction but based on the facts, the Company was not trading, and the contracted-out work was not undertaken at all, let alone being relevant R&D activity. Therefore, the Company was not granted the deduction based on their appeal and lost the case.
Have any queries to ensure your next R&D claim is fully compliant? Feel free to contact rdtax@ct.me.
