Key Facts
- •Stage One Creative Services Ltd (SOCS) appealed HMRC's refusal of its corporation tax R&D relief claims for accounting periods ending 31 December 2017, 2018, and 2019.
- •HMRC argued SOCS's R&D expenditure was both 'subsidised' and 'contracted out' under Part 13, Corporation Tax Act 2009.
- •SOCS argued its R&D expenditure was qualifying expenditure, not subsidised, and not incurred in carrying out contracted R&D activities.
- •HMRC issued discovery assessments for 2017 and 2018 and a closure notice for 2019.
- •The Tribunal considered whether a generally prevailing practice existed regarding the interpretation of 'subsidised' and 'contracted out' expenditure.
Legal Principles
Statutory provisions must be interpreted purposively, considering whether they were intended to apply to the transaction viewed realistically.
Balhousie Holdings Ltd v HMRC [2012] UKSC 11
Statutory interpretation involves an objective assessment of the meaning a reasonable legislature would convey.
R (Project for the Registration of Children as British Citizens) v Secretary of State for the Home Department [2023] AC 255
Discovery assessments under Schedule 18, Finance Act 1998, require HMRC to prove they could not have reasonably expected to be aware of the tax insufficiency before the enquiry window closed.
Schedule 18, Finance Act 1998
A discovery assessment is not valid if the tax insufficiency is attributable to a mistake in the return based on a generally prevailing practice at the time.
Paragraph 45, Schedule 18, Finance Act 1998
Outcomes
Appeal allowed.
The Tribunal found that SOCS's R&D expenditure was neither 'subsidised' nor 'contracted out' within the meaning of the relevant legislation. They relied heavily on the reasoning in Quinn v HMRC [2021] UKFTT 0437 (TC), distinguishing Hadee Engineering Co Ltd V HMRC [2020] UKFTT 497 and finding a generally prevailing practice supporting SOCS's approach.
Discovery assessments for 2017 and 2018 were invalid.
The Tribunal found that a generally prevailing practice existed based on HMRC's older guidance, and SOCS's returns were made in accordance with this practice. Even if there had been a lack of full disclosure in the R&D reports this was not sufficient to invalidate the claims. Therefore, the condition for a valid discovery assessment was not met.