HMRC successful at tribunal on denying R&D tax credit

In a recent case decided at the First-tier tribunal (FTT), MW High Tech Projects UK Ltd [2024] TC 09011, lost its appeal and the tribunal instead agreed with HMRC that a claim for the research and development expenditure credit (RDEC) was not valid as the company’s accounts show that it was not a going concern at the time of the claim.

This case was important to HMRC because the outcome shows that amendments to the relevant legislation made subsequent to the events of this case had no bearing on the outcome, since these amendments did not have a retrospective effect.

In summary, the taxpayer (MW High Tech Projects Ltd) submitted an RDEC claim for nearly £2m in its corporation tax return for the year ended 30 December 2017 and sought a cash payment of the RDEC credit.

The company’s accounts for the two years ended 30 December 2017 and 2018 stated that the company was not a going concern. This position was reversed for the year ended 31 December 2019, which showed the company being a going concern.

HMRC refused the RDEC claim for the year ended 31 December 2017 on the basis that the S.104S of Corporation Tax Act 2009 states that the cash payment of RDEC to companies that are not going concerns is restricted. However, the legislation does provide for tax relief if within the enquiry amendment window of the return in which the relief was claimed the company becomes a going concern again.

HMRC did pay an amount of RDEC based on the 2018 accounts as the 2019 accounts showed the company had returned to being a going concern.

The company tried to argue its case on grounds that:

1. Since a literal reading of the relevant provision in S.104S CTA 2009 prevented it from obtaining a payment of an RDEC credit for 2017, a ‘purposive’ approach to the legislation should be taken
2. Amendments made in Finance Act 2023 would indicate that the legislation was previously flawed and should be read to allow the RDEC claim for 2017.
3. Its accounts for 2017 and 2018 should not have been drawn up on the basis that the company was not a going concern. These accounts should therefore not be relied upon. The company further argued that there had been a prior-year adjustment (PYA) in the 2019 accounts, which should be taken into account.

S.104T of CTA 2009 sets out that a company is a going concern at a particular time if it is not in liquidation or administration at that time, and its latest published accounts were prepared on a going-concern basis, with nothing in those accounts indicating that this was due to the expectation that the company would receive any RDEC relief.

The FTT did not agree that ‘purposive reading’ of the legislation was required as there was no evidence that Parliament had not intended there to be a difference between companies filing accounts on the basis that they were not a going concern and those in administration or liquidation.

The FTT also considered and decided that the FA 2023 amendments to the legislation were not retrospective and therefore did not have any bearing on the case.

The FTT looked at the accounts and accounting standards in detail, and came to the conclusion that no accounting or auditing standards were breached in drawing up the 2017 and 2018 accounts on the basis that the company was not a going concern.

Statements made in the 2017 and 2018 accounts regarding the company’s intention to cease trading were purported to be incorrect by the company’s finance director (FD), and by the time the 2019 accounts were prepared the company had decided to resume trading. It was found that the FD had changed his view on the going concern treatment after realising the impact on the RDEC claims.

The FTT also found that in fact no PYA adjustments had been made in the 2019 accounts as there was nothing in those accounts that qualified as a PYA.

The FTT dismissed all of the company’s appeals.

This case highlights that fact that if accounts are not made up on a going-concern basis, and these are the relevant accounts to be considered for the claim, a claim for the cash payment of the credit will be denied. The relevant accounts for an RDEC claim are the latest published accounts prepared on a going-concern basis at the time of the claim.