Tribunal Upholds HMRC Decision in MW High Tech Projects UK Ltd Case on RDEC Claims and Going Concern Basis

Citation: [2023] UKFTT 1040 (TC)
Judgment on

Introduction

This case analysis delves into the decision of the First-tier Tribunal (Tax Chamber) in the matter of MW High Tech Projects UK Limited v The Commissioners for HMRC ([2023] UKFTT 1040 (TC)). The case addresses the complex interplay between accounting practices, corporate tax law, and the implications for Research and Development Expenditure Credit (RDEC) claims when a company files its accounts on a basis other than going concern.

Key Facts

MW High Tech Projects UK Limited (the Appellant) filed a corporation tax return that included a claim for an RDEC of £1,934,343.19, which HMRC refused. The refusal was based on the fact that the Appellant’s accounts for the years in question were not prepared on a going concern basis. HMRC’s position was firmly rooted in the provisions of the Corporation Tax Act 2009, specifically sections 104S and 104T.

During the case, the Appellant challenged the refusal based on several grounds, including the purposeful interpretation of statutes, error in statutory provisions, incorrectness of its accounts, the effect of a prior period adjustment (PPA), the interpretation of international accounting standards, and auditing standards, among others.

A number of legal principles were applied and clarified during the proceedings:

  1. Literal and Purposive Interpretation of Statutes: The Tribunal confirmed that while legislation must be interpreted purposefully, the literal meaning of the words cannot be ignored, especially when the statutes are clear and unambiguous as in Corporation Tax Act 2009 sections 104S and 104T. The case of Inco Europe Ltd v First Choice Distribution [2000] was cited, emphasizing that although courts can correct drafting errors, they must do so with caution and only when absolutely sure of Parliament’s intended purpose.

  2. Non-Retrospective Application of Statutory Amendments: The case examined recent amendments to section 104T by Finance (No 2) Act 2023 and concluded that these amendments were not retrospective and hence inapplicable to the Appellant’s case.

  3. Accounting and Auditing Standards: The Tribunal established that the preparation of financial statements on a going concern basis, as prescribed by International Accounting Standard 1 and the Financial Reporting Council’s guidance, is contingent upon the intention of management regarding the continuation of trade. The Tribunal also clarified that the revision of the International Standard on Auditing (UK) ISA 570 did not change the requirements for going concern assessments.

  4. Prior Period Adjustment (PPA): It was held that a PPA, under IAS 8, does not have the retroactive effect of amending previously published accounts or transforming the basis on which they were prepared. Also, the going concern assessment is an assumption rather than an accounting policy, hence a change in accounting policy could not be applied retrospectively in this case.

  5. Tax Treatment of Non-Going Concern Accounts: Crucially, the Tribunal had to interpret the requirements for a company to qualify for an RDEC and, in particular, the restrictions imposed by the Corporation Tax Act 2009 where the latest published accounts were not prepared on a going concern basis.

Outcomes

The Tribunal dismissed the appeal and upheld HMRC’s decision, concluding that:

  • The statutory provisions regarding RDEC claims are clear and the Appellant’s entitlement to a RDEC was extinguished because its latest published accounts did not use the going concern basis.
  • The Appellant’s accounts were not incorrectly prepared just because HMRC and others took issue with their going concern status.
  • Typographical or apparent legislative errors cannot be corrected by the Tribunal if they do not satisfy the requirements set out in the case law such as Inco Europe Ltd.
  • The extra-statutory concession B41 does not apply to the facts of the case as there was no out-of-time claim for repayment of tax or error by HMRC.

Conclusion

The Tribunal’s decision in MW High Tech Projects UK Limited v The Commissioners for HMRC is a reminder of the importance of strict adherence to the language of the statute, the non-retroactive nature of legislation, and the clear delineation between accounting assumptions and accounting policies. It serves as a critical reference for the interpretation of tax law in the context of RDEC claims, illustrating the limitations of the Tribunal’s jurisdiction to rewrite or interpret legislation beyond the intention of Parliament or to accommodate perceived fairness in individual circumstances. For legal professionals, this case reinforces the principle that while purposive interpretation is vital, it cannot displace the clear meaning of statutory language.

Related Summaries