Late evidence causes R&D relief claim to fail

In Grazer Learning Limited v HMRC [2021] TC08282, the First Tier Tribunal (FTT) rejected an appeal against HMRC's denial of an R&D expenditure claim. The appellant's evidence was ruled inadmissible by the court on the basis that it was filed late and not shared with HMRC.

• The appellant is a small company looking to match customers with digital learning providers.
• Grazer Learning sub-contracted the creation of an innovative platform that would uniquely match the customer to the content through the customer's prior experience and individual learning goals.
• The platform itself was described as being in a 'permanent beta' state, meaning it was capable of being constantly improved.
• They submitted an R&D claim for the expenditure for the Sub-contracted work and received a tax credit. HMRC opened an enquiry and then issued a Closure notice denying the claim and requiring the repayment of the credit.
• The FTT issued a deadline of 11 December 2020 for the submission of witness statements to the other party, where the parties wished to rely on that evidence in court. 
  • The witness statement of the owner was submitted to the FTT on 9 April 2021 but not to HMRC.
  • Three further witness statements (from the sub-contracted developer and two digital learning experts) were submitted on 13 September 2021, again to the FTT and not to HMRC. This was three days before the hearing.
  • Although ruling the statements inadmissible meant the appellant had no means of supporting the appeal with evidence, the judge did just that on the basis that it was clear to all that these statements were needed to defend the claim, even during the enquiry. The FTT direction to produce statements was unambiguous and the failure to do so in time by the appellant was inexplicable.
  • Instead, the judge relied upon the initial R&D report and the correspondence between HMRC and the appellant's representatives.

The burden of proof was on the appellant to show that the expenditure forming the basis of the claim was:

• Incurred in the course of a project, which sought to achieve an advance in science or technology.
• Incurred on activities directly related to achieving that advance.

The FTT held:

• There was only an assertion and no proof that the activities amounted to an advance and not to a novel utilisation or adaptation of existing technology.
• There needed to be proof that the qualifying criteria had been met. Without witness testimony, the judge could not conclude that was the case.

The appeal was dismissed.

Useful guides on this topic

R&D: SME Tax Credit scheme
What Research & Development (R&D) schemes are available for small and medium-sized companies undertaking R&D? How to make an R&D claim? What are the qualifying costs and how much can be claimed?

R&D: Staff costs, subcontractors & reimbursed expenses
What staff costs qualify for relief? Who are externally provided workers? Can you claim sub-contractor costs? Do reimbursed employee costs qualify?

R&D: Software
Is software development qualifying activity for Research & Development (R&D) relief?

R&D Zone: Do I have a valid R&D Claim? (DIY Advanced Assurance)
Do I have a valid R&D Claim? What conditions do I need to meet? What form of relief can I claim?

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Grazer Learning Limited v HMRC [2021] TC08282