Court dismisses £26k R&D tax credit
The Court has dismissed a claim that expenditure of £26,050 fell under research and development (R&D) and has ordered the business to pay it back
In September 2021, the First Tier Tribunal ruled that the expenditure of £26,050 by Grazer Learning Ltd was not classed as R&D and was not entitled to be treated as a tax credit and has ordered the company to pay the money back to HMRC.
The claim for the credit by Grazer Learning, which is a start-up company that develops online and digital tools to help tutors and students, was made in the accounting period ending 31 October 2017 based on the creation of an online platform that would take into account a learner’s prior experience and specific learning goal in offering learning content.
The claim produced a payable tax credit of £26,050 which was received by the company on 6 June 2018. However, an inquiry was opened into the claim on 9 September 2019 where HMRC disagreed that the work undertaken constituted as qualifying for R&D relief and ordered the company to pay back the credit.
On 11 November 2020, First Tier Tribunal issued directions that required each party to submit evidence and statements by no later than 11 December 2020 but Grazer Learning submitted its evidence documentations too late and did not send its documents to HMRC despite the instructions to do so.
In the court documents, Judge Tony Beare stated: ‘None of the four witness statements… had been sent to the respondents prior to the hearing and the respondents were not even aware prior to the hearing that the appellant was proposing to adduce any witness evidence at the hearing.’
HMRC then requested that the evidence should not form part of the hearing without a formal application to do so. Grazer Learning made the application which was then objected to by HMRC.
Judge Beare stated that ‘the fair and approach, in this case, would be to continue with the hearing but refuse to allow the witness evidence in question to be admitted’.
Grazer Learning argued that the expenditure was to develop a platform that was described as a ‘satnav for learning’ and that the platform was very different from any other learning platform available on the market and had yet to be completed.
Grazer Learning described the platform as a ‘permanent beta’, meaning that there was no end to discovering new ways in which the platform can be improved.
Grazer Learning stated that the platform involved the creation of new pathways, as opposed to simply gathering up pathways from other learning platforms. It claimed that other learning platforms are constrained by the existing formal education curriculum so that the coding required to bring an individual to a specific subject area is a single pre-defined pathway.
The argument behind this statement was that this was a new concept of coding and digital design which would innovate the digital learning industry and that it would fall under the terms for R&D.
HMRC accepted that the platform was something different from other platforms but argued that Grazer Learning had not established that the expenditure was incurred with the ‘intention of resolving a scientific or technological uncertainty, with the intention to make a scientific or technological advance’ as opposed to being incurred with the intention of making novel use of existing technology or adapting existing technology.
The tax authority stated that ‘the mere fact that the appellant’s proposed platform offered additional functionality does not demonstrate either of these things’.
HMRC also argued that the expenditure in this case was not incurred in the course of a project which is required by the gand that as Grazer Learning described the platform as being in a ‘permanent beta’ state they had not provided evidence of the existence of a plan to overcome an alleged uncertainty, with a start date and an end date.
Against this argument, Grazer Learning stated that if HMRC had not objected to the application for evidence that the company would have provided ‘two respected experts in the field of digital learning’ that could have explained ‘why the work carried out involved the resolution of a scientific or technological uncertainty and involved a scientific or technological advance and how the work did not involve a combination of technologies which was readily deducible by a competent professional in the field’.
Judge Beare commented: ‘The absence of witness evidence has made it very difficult for me to ascertain with any degree of precision the nature of the work carried out. In my view, it is wholly unclear whether the creation of the platform described involved the creation of new technology which was designed to resolve a scientific or technological uncertainty’.
As a result, the judge commented ‘it is impossible for me to find in favour of the appellant in this appeal’. The appellant’s appeal against HMRC was dismissed.
The court has allowed Grazer Learning to appeal the decision.
Story by Ruby Flanagan of Accountancy Daily