Hadee Engineering Co Ltd v Revenue & Customs (CORPORATION TAX - Research and Development) [2020] UKFTT 497 (TC)

FTT-Tax

Hadee Engineering Co Ltd v Revenue & Customs (CORPORATION TAX - Research and Development)

[2020] UKFTT 497 (TC) · 2019-11-26

[49]“ In cross-examination Mr Price was asked to identify what scientific or technological breakthrough was involved in such "innovation, creativity and uncertainty" by reference to each of the sub-paragraphs and he was compelled to answer that he could not do so because he lacked the technical background and knowledge. Mr Evans nowhere describes any new scientific or technological development achieved by BES' staff which enabled BES to be "ahead of the curve" in developing interactive computer games and other products. This could have been achieved by the use of existing computer technology.

[57]Miss Berry's answers highlighted the fact that she did not herself have the technological expertise with which to answer the questions, and in particular, she was not able to describe any scientific or technological innovation or breakthrough which BES staff were trying to achieve or had achieved. ” 182. In essence, HMRC’s case consists of the following assertions:(1) There is no evidence to support that there was an advance; and

(2) There is no evidence that the activities were conducted as a “project”. 183. Mr Firth submitted that point (1) is a misunderstanding of both the law and burden of proof. It is plain that Mr Lowe is a competent professional such that his view of the problem and solution as an advance satisfies the legal test. Furthermore, once the Appellant has established a prima facie case by Mr Lowe’s evidence, the evidential burden passes to HMRC to advance evidence to support a contrary position. HMRC have failed to adduce any evidence from a competent professional and the views of HMRC or Mr Priestley about what a competent professional engineer would or would not adduce are both irrelevant and admissible. 184. The Appellant submitted that the correspondence between the Appellant and its customers sought by HMRC would only give a small part of the picture; the oral evidence of Mr Lowe is sufficient to provide a fuller picture when considered together with the documents showing expenditure. Mr Lowe gave considerable thought to the estimates provided and discussed the projects in detail with MSC which enabled MSC to provide a technical report. Although there is no contemporaneous evidence to verify the figures claimed, there is no evidence to show that the estimates are unreasonable and therefore unless there is reason to believe that they are unreasonable they should be accepted. Mr Lowe did his best to answer questions in evidence given the passage of time; the criticisms levelled against him are unfair. The only challenge arising from HMRC’s case related to the number of hours Mr Lowe worked per day; that of itself does not undermine the figures as a whole and therefore it is reasonable to conclude that the estimates are reasonable. The legislation anticipates apportionment for consumables and staff and it is therefore for the Tribunal to carry out a just and equitable apportionment exercise as it does in the context of different appeals. 185. The Appellant submitted that HMRC had, to a degree, accepted the costs relating to subcontracted work as Mr Reilly had based his analysis on the handwritten notes provided by Mr Lowe. The Appellant agreed with Mr Reilly’s observation that not all job codes were available; the Appellant sought to resolve this by seeking clarification from Mr Marshall albeit at a late stage of proceedings. The Appellant has produced its best breakdown of costs which the Tribunal was invited to adopt. 186. Mr Firth submitted that HMRC’s submission that the marine gears project may not even have taken place was misconceived; there was no challenge to Mr Lowe’s honesty and Mr Firth submitted that the evidence he gave was truthful and to the best of his recollection. 187. Mr Firth submitted that it was a matter for HMRC that it chose not to instruct an expert; HMRC was in possession of the MSC Report and the Appellant’s witness statements; in the absence of expert evidence on behalf of HMRC the Tribunal is left with the evidence of Mr Lowe. 188. Point (2) seeks to impose an unnecessary and unjustified level of formality onto R&D. The Guidelines identify a project as “a number of activities conducted to a method or plan in order to achieve an advance” (see para 19). The Appellant submitted that the activities were plainly projects and by way of examples highlighted the following: (1) The marine gears project involved trialling different methods of welding whilst altering the heat, speed and other parameters in order to find a solution; (2) The double deck loader project involved a plan to build a moving floor using one hydraulic cylinder rather than 16;

(3) The hollow ingot project involved a plan to design and trial different methods of manipulating the ingots to identify one that could cope with the extreme weight and heat;

(4) The trombone gantry project involved a plan to design a retracting platform without an initial jolt;

(5) The 5000 tonne manipulator project involved a plan to develop a stronger track that could withstand the immense weight;

(6) The titling washdown system involved a plan to develop a tilting mechanism to allow the machine to be cleaned safely;

(7) The animal waste centrifuge project involved a plan to research the optimum speed and temperature at which fat would be separated from animal waste and develop a way to reach those speeds and temperatures in a viable design. 189. The Appellant submitted that it would be wrong to expect a “plan” in this context to consist of a series of predetermined steps as the whole point of R&D is that the ultimate solution is not known and it is inherent in the uncertainty that not all steps can be planned. 190. In relation to the specific projects the Appellant made the following submissions: Marine gears 191. Mr Firth submitted that the Appellant had identified flaws in the approved process and developed a new welding process for dissimilar alloys. If the evidence of Mr Lowe was accepted the project constituted R&D. Double deck loader 192. Mr Marshall was involved in this project. The patents exhibited by HMRC do not cover the Appellant’s solution and therefore HMRC cannot show that the intellectual property rights are vested elsewhere. Furthermore, it was submitted, the rights could potentially be shared. The test is not whether new technology was used or existing technology adapted; relying on paragraph 13 of the BIS Guidelines the Appellant submitted that there does not need to be a fundamental advance in technology. The solution was not readily deducible and HMRC have not demonstrated otherwise. The Appellant disputed that the activities were subcontracted to the Appellant; the customer simply purchased the final product and drawings. In relation to subsidisation, the Appellant sold the product and needed to recover its costs. Hollow Ingot 193. Atkins Bennett was involved in this project. It is clear that the solution was not readily deducible as demonstrated by the need to build a prototype. The activities were not subcontracted to the Appellant; the customer purchased the final product and drawings. In relation to subsidisation, the Appellant sold the product and needed to recover its costs. HMRC’s submissions are speculation and they have produced no evidence to support their assertions. Trombone Gantry 194. The Appellant submitted that the Appellant’s activities which sought to achieve a product in practice and the design challenge referred to be HMRC fell within paragraph 13 of the BIS Guidelines. There is no reason why the Appellant’s description of “exploring” cannot amount to R&D and the fact that colleagues were spoken to in order to overcome the challenges demonstrates that the solution was not readily deducible. The use of technology from a different field which is taken and applied in a different context can constitute R&D. The Appellant relies on the same submissions made earlier relating to intellectual property; there is no reason and HMRC have not shown that the rights are not vested in the Appellant. 5000 tonne manipulator 195. The Appellant relied on its earlier submissions; its activities sought to achieve a solution in a practical context which is sufficient to demonstrate the uncertainty. The activities were not subcontracted or subsidised for the reasons set out above. Tilting washdown 196. The Appellant highlighted its earlier submissions, adding that the Appellant was given the opportunity to improve the process by which slide formers were cleaned. The Appellant designed a tilt to the machine which needed to be strong enough to turn and accommodate various weights. The considerations such as weight clearly demonstrated that the product and improvement were not readily deducible. Animal centrifuge 197. In support of the Appellant’s submission that this was a collaborative project, Mr Firth relied on HMRC’s “Corporate Intangibles Research and Development Manual” published on 11 March 2016 (updated 29 April 2019) “subcontracted R&D activities” which stated:

“Where two companies are both carrying out R&D on the same subject they may decide to pursue the R&D jointly with each making a contribution and each free to enjoy any fruits of the R&D. This is collaborative research and each company would potentially be eligible for R&D relief on its share of the qualifying expenditure. … Where one company engages another company to carry out R&D activity on the first company’s behalf in exchange for payment, with the first company having rights to the intellectual property resulting from the R&D then that is subcontracting of the R&D to the second company.” 198. The aim was to achieve clear water; Agritech had the waste experience and the Appellant had the engineering expertise. The evidence was that the Appellant was not paid by Agritech and therefore the project was not contracted out. General 199. On behalf of the Appellant it was accepted that the figures put forward by the Appellant required amendments in light of the concessions made relating to Mr Lowe’s bonus and additional evidence relating to Mr Marshall. The issue relating to Mr Lowe’s bonus in 2008 appears to have arisen as a result of using payroll data for tax years rather than financial years. In those circumstances Mr Firth invited the Tribunal to reach its decision in principle with the numerical effect of the decision to be considered by the parties. 200. Mr Firth submitted that HMRC’s restricted and strict approach is not consistent with the guidelines. In relation HMRC’s analogy of a “circle of knowledge”, Mr Firth submitted that although the Appellant agreed to an extent, HMRC’s reference to expanding overall knowledge is incorrect; the guidelines clearly recognise at paragraph 20 that a more nuanced view should be taken by the inclusion of what is publicly available or readily deducible. Applying that approach to Mr Lowe’s evidence that he was not aware of a solution or an “off the shelf” product, then such work would fall within R&D notwithstanding that there may be someone else in the world with a solution. 201. Mr Firth submitted that HMRC’s repeated reference to knowledge and knowing whether something is or is not possible is not the test; the BIS Guidelines at 13 include how to achieve something in practice. Therefore, if someone seeks to achieve something then this is sufficient to amount to addressing a technological uncertainty. By way of example, the tilting washdown project involved a number of considerations in working out how to achieve something that it was believed must be possible; HMRC are wrong to submit that this makes the solution readily deducible. 202. In relation to the issue of adaption, HMRC submitted that it must come from another field to amount to R&D. The Appellant disagrees; the BIS Guidelines state that it “includes” but is not limited to adaption of knowledge from another field. HMRC have conflated the adaption of existing technology with adaption of technology from another field; the Guidelines do not say that it is excluded. The application of technology to a different field can demonstrate an uncertainty, for instance the use of hydraulic cylinders in the tilting wash down system. 203. The Appellant submitted that the question is not whether Mr Marshall would be the most competent professional but whether Mr Lowe is a competent professional which HMRC accept for all projects except animal centrifuge. The Appellant submitted that Mr Lowe’s experience of engineering clearly qualifies him as a competent professional. 204. . The Appellant did not agree with HMRC that subcontracting does not require payment specifically for R&D. The Appellant submitted that it is logical to conclude that contracting out requires an agreement to carry out R&D for which payment is received. In this appeal the Appellant was asked to provide a specific product which the customer purchased. 205. Similarly, the Appellant did not agree with HMRC’s submission relating to subsidy. The Appellant submitted that HMRC’s approach, if accepted, would lead to the very broad effect that where a taxpayer agrees to make a product and attempts to recover its costs at sale this would be deemed to be subsidised. The Appellant submitted that this approach is not correct and that payment for a product is not subsidising R&D. 206. In respect of proof of sub-contracted costs, the invoices in support were analysed and incorporated into the R&D claims by MSC; there is no reason to believe that this was done in an incorrect or inappropriate way. As to contracting out and subsidies, Mr Lowe’s evidence confirms that the Appellant undertook projects at its own risk and that the final product, if developed, was sold on commercial terms. 207. Mr Firth submitted that the Appellant’s evidence demonstrated that the activities were carried out as projects. Whilst the evidence that HMRC seek of a detailed process of budgeting, identification of existing knowledge, design of a scientific process and documentation of attempted resolution of uncertainty might be the ideal, it is far more than required by the BIS Guidelines. 208. As to proof of expenditure the Appellant submitted that it is the Tribunal’s task to assess the evidence in order to arrive at its best assessment of the expenditure incurred on the projects. Furthermore, reliance on the burden of proof to decide a case is exceptional. In support of its submission the Appellant relied on Anglian Water Services Limited v HMRC [2018] UKUT 431 (TCC) at [62] & [63]: “ Clearly the FTT had to focus on the evidence before it, the relevance and probative value of that evidence and the weight to be attached to the different types of evidence. It had to make findings of fact based on that evidence and consider what inferences it could properly draw from those primary facts. There was no dispute that this was the approach the FTT was bound to take. In contrast, Mr Mantle submitted that the FTT properly strove hard to reach a decision based on the evidence and that was the right approach. He referred us to Stephens v Cannon [2005] EWCA Civ 222 for the propositions described by Wilson J at [46]: “46. From these authorities I derive the following propositions: (a) The situation in which the court finds itself before it can despatch a disputed issue by resort to the burden of proof has to be exceptional. (b) Nevertheless the issue does not have to be of any particular type. A legitimate state of agnosticism can logically arise following enquiry into any type of disputed issue. It may be more likely to arise following an enquiry into, for example, the identity of the aggressor in an unwitnessed fight; but it can arise even after an enquiry, aided by good experts, into, for example, the cause of the sinking of a ship. (c) The exceptional situation which entitles the court to resort to the burden of proof is that, notwithstanding that it has striven to do so, it cannot reasonably make a finding in relation to a disputed issue. …”

There was no dispute about these propositions. ” 209. In the real world, it is often necessary to rely on reasonable estimates. The schedules which accompanied the R&D claims set out the calculations. The Appellant has provided its best estimates of staffing time and costs. HMRC have produced no evidence to contradict those estimates and in those circumstances HMRC cannot succeed in undermining the Appellant’s estimates to such a degree that the Tribunal cannot reach any findings on the issue and would be entitled to rely on the burden of proof. 210. The Appellant submitted that as it was the Appellant that undertook the research and development and developed solutions there is no basis to conclude that the Appellant was not entitled to use the solutions it arrived at or that the intellectual property was vested elsewhere. The evidence of Mr Lowe confirmed that in respect of specific projects, such as the double deck loader, the Appellant marketed and sold units. Condition C is satisfied irrespective of whether or not other persons were also entitled to reuse the solutions and the patents identified by HMRC do not cover the solutions developed by the Appellant. Discussion and Decision Our approach to the applicable legislation 211. Our approach was to consider each of the activities and associated expenditure which made up the Appellant’s claims for R&D relief and apply the legislative provisions to those activities. We noted Mr Firth’s submissions regarding the burden of proof and the observations made in Anglian Water (above). Whilst we agreed with the comments of the UT set out above, on our reading a clear distinction is drawn between “a legitimate state of agnosticism” which required resort to the burden of proof in order to reach a decision and findings of fact made following consideration and balancing of the relevance, probative value and weight to be attached to evidence from which those findings of facts and inferences can properly be drawn. In this appeal, for reasons we will set out, we found that the evidence on behalf of the Appellant was unreliable, vague and at times inconsistent to the extent that we could not be satisfied on the material before us that the statutory requirements were met. 212. Despite significant amount of correspondence in the bundles a significant proportion of the documents related to background information such as the Information Notices issued to the Appellant and the direct evidence relating to the R&D claim was limited. We disregarded the submissions and evidence of both parties regarding the provision of documents and Appellant’s co-operation which we considered irrelevant to the issues to be determined and we have reached our decision on the basis of the material before us. 213. Our starting point was to consider the definition of R&D (for period ended 30 April 2009 s834A ICTA 1988 and the equivalent provision for the period ended 30 April 2010 at s1138 CTA 2010). For the purposes of this appeal there was no material difference to the tests that we must apply. 214. The BIS Guidelines at paragraph 3 set out that R&D takes place when a project seeks to achieve an advance in science and technology. The activities must also directly contribute to achieving this advance through the resolution of scientific or technological uncertainty. Paragraph 19 defines a “project” as consisting of a number of activities conducted to a method or plan. The BIS Guidelines state that “it is important to get the boundaries of the project correct” in that it should include all of the activities “which collectively serve to resolve the scientific or technological uncertainty associated with achieving the advance”. The Guidelines clarify that a project could include a number of sub-projects or be part of a larger commercial project although in the latter situation the wider project which does not address the scientific or technological uncertainty would not be R&D. 215. The parties took different views on what is required in order for activities to constitute a project; HMRC sought evidence of plans and records to substantiate the Appellant’s assertion that its activities amounted to a project whereas Mr Firth submitted that HMRC’s approach was overly narrow and the inherent uncertainty involved in R&D means that plans cannot always be formulated in the proscriptive manner suggested by HMRC. 216. The Oxford Dictionary defines “project” as: “a plan or scheme; a planned undertaking” 217. We preferred the submissions on behalf of HMRC. We considered that the BIS Guidelines reflect the ordinary everyday meaning of “project” and that formulation of a plan is required for R&D activities. Although there is no requirement for a plan to be recorded in a particular manner, we would expect some record or documentary evidence or, in the absence of which, a detailed explanation which identified the uncertainty and the way in which the activities were designed to resolve it; in doing so the “boundaries” highlighted by the BIS Guidelines would be clearly identified and the activities which contributed to seeking the resolution of the uncertainty would also be identifiable. 218. Paragraph 6 of the Guidelines requires that an advance in science or technology extends overall knowledge or capability in a field. As noted by the Appellant this includes adapting knowledge or capability from another field although an advance is still required and the adaption must not have been readily deducible. 219. The uncertainty required by the Guidelines arises where knowledge of whether something is possible or achievable in practice is not readily available or deducible by a competent professional in the field. Notably, uncertainties that can be readily resolved by a competent professional and improvements/fine-tuning which do not “materially affect the underlying science or technology” are not R&D. This is consistent with the requirement for an advance which, it appears to us, must go beyond a minor improvement and which materially affects the characteristics. 220. In summary, we considered that the Appellant is required to demonstrate that there was a clear methodology behind the activities which were carried out such that it identified the uncertainty it sought to resolve and in doing so attempted to produce (whether or not successful) a material change or improvement which added to or extended knowledge in a field of science or technology which was not publicly available or could be worked out by a competent professional in that field without difficulty. 221. In our view a narrow approach is required; we found support for this view in Gripple Ltd v Revenue and Customs Commissioners

[2010] EWHC 1609 (Ch)

at [12]: “I would, however, make the general point that the provisions form a detailed and meticulously drafted code, with a series of defined terms and composite expressions, and a large number of carefully delineated conditions, all of which have to be satisfied if the relief is to be available. The schedule runs to 26 paragraphs and occupies ten pages in Tolley's Yellow Tax Handbook for 2005/06. I emphasise this point because one of Mr Gordon's submissions for Gripple is that the schedule evinces a general intention to provide enhanced relief for expenditure on R & D, and that a generous construction should where possible be adopted in order to further that general aim. I am unable to accept this submission. It seems to me, on the contrary, that a detailed and prescriptive code of this nature leaves little room for a purposive construction, and there is no substitute for going through the detailed conditions, one by one, to see if, on a fair reading, they are satisfied.” 222. The references to “detailed and meticulously drafted code” and “carefully delineated conditions” in our view makes clear that the Guidelines require strict application to achieve their purpose. This view appears consistent with the approach in B E Studios v Smith & Williamson [2005] EWCH 1506 (Ch) (“ B E Studios ”) from which we derived assistance at [45], [46] & [55]:

[45]“45. In his closing written address for S&W, Mr Pilling makes the following submissions: - "3 It is … remarkable that the Claimant's witness evidence made virtually no attempt to address either of these questions. No evidence was led which identified what the Claimant was actually doing which constituted R&D. Those witnesses who touched on this subject in their statements did so fleetingly, and in determinately non-specific terms. No evidence was called from any of the employees who were supposedly engaged in R&D. Most of those employees did not even get a mention in the witness statements of those witnesses who were called. 4 What emerged from the evidence is that both the Claimant's factual witnesses and its expert witness, Mr Owen, have made an assumption that because they believed that the Claimant's products were in some general sense "innovative" or "cutting edge" it therefore follows that they were the product of R&D within the meaning of the statute…. 5 It is submitted that this bare assumption was not a sufficient basis upon which to advance a claim for R&D tax credits to the Inland Revenue, and neither is it a sufficient basis to advance a claim for damages against the defendant."

[46]I have to say, straight away, that I accept Mr Pilling's submissions. My reasons for arriving at that conclusion involve an examination of the evidence of those of BES' staff who gave evidence and what is known or can be deduced from their evidence and from the documentary evidence about the role and work performed by the other members of BES' staff who were not called. …

[55]Mr Evans nowhere describes any new scientific or technological development achieved by BES' staff which enabled BES to be "ahead of the curve" in developing interactive computer games and other products. This could have been achieved by the use of existing computer technology. ”223. The remaining issues provided for under s1052 or s1053 CTA 2009 relate to qualifying expenditure, what that qualifying expenditure related to, issues relating to intellectual property and whether the activities were contracted out or subsidised.

224. The Appellant submitted that sub-contracting exists where a person pays another to undertake R&D. It does not exist where one person asks another to see if they can find a solution to a problem and if they can that product will be purchased. The Appellant highlighted HMRC’s Guidance CIRD 84250:

“where one company engages another company to carry out R&D activity on the first company’s behalf in exchange for payment, with the first company having rights to the intellectual property resulting from the R&D then that is subcontracting of the R&D to the second company” 225. The Appellant also submitted that payment made to obtain goods/services is not one made in order to meet directly or indirectly the expenditure of the company - even if that expenditure was incurred in order to be able to provide the service or goods 226. We note that HMRC’s manual is guidance only and does not have the force of law. We also observe that Conditions D and E are drafted in wide terms; Condition D refers to activities which are “contracted out” without any specific reference to payment. However, we agree that logically the contracting out of activities would usually, but not necessarily, involve payment. The difficulty for the Appellant in this appeal is that no terms of engagement have been provided which may have clarified the nature of the activities forming part of the contract and whether, and if so to what extent, R&D was included. In our view, there is no reason why any payments made could not be for the product, the R&D or both. Similarly, we did not accept the Appellant’s submissions regarding subsidisation; section 1138 makes clear that expenditure is treated as subsidised “to the extent that it is otherwise met directly or indirectly by a person other than the company.”

In our view this could include R&D. We have therefore proceeded to reach our conclusions on the basis of the material before us, drawing inferences where we concluded it was reasonable to do so. 227. The statutory requirement until 9 December 2009 was that any IP created as a result if the R&D was vested in the company. There was no requirement that IP must be created, only that if it was created it vests in the company. 228. The Appellant noted the pragmatic approach taken in HMRC Manual CIRD81550: “The carrying out of R&D without the creation of any IP does not prevent relief being due. The requirement is only that if any IP arises from the R&D then it vests in the company. In practice, there are many different forms of IP and attempting to identify all of them and the attached legal rights might often be an unrealistic task to attempt. In practice it should generally be accepted that so long as the claimant company has a real and material interest in any IP that has arisen, then the test is satisfied. But where there is an agreement recording that all IP that is created belongs to another party that is likely to be conclusive evidence that the IP test is failed.” 229. The Appellant noted that this guidance is consistent with the general principle against requiring proof of a negative as per Kellogg Brown & Root Holdings (UK) Ltd v HMRC

[2010] EWCA Civ 118

at [47]: “The fact that s50(6) of the Taxes Management Act 1970 places an initial general onus on the taxpayer challenging an assessment does not affect the point that, if HMRC’s assessment relies on the fact that two apparently independent companies are “connected” under the terms of s286(5)(b), then that would be for HMRC to prove.” 230. The requirement is applied at the time when the IP is created. It is no bar to relief that someone else subsequently has the IP as long as the claimant company was not obliged to transfer the IP under a pre-existing agreement, as per the example in HMRC’s manual: “Ark Engineering Ltd has an arrangement with its researchers, and a local university to which it sub-contracts part of the work, that patent rights are split equally on any invention that they devise. The R&D project results in an invention that has commercial possibilities. Immediately following the grant of the patent the company transfers its rights to a subsidiary. Although the company holds a part of the rights and held them only for a brief period it meets the requirements of the legislation, because it was not obliged to transfer them by any pre-existing agreement.” 231. We accepted the Appellant’s submissions relating to IP issues and our findings are set out below. General conclusions on the evidence 232. We considered Mr Firth’s submission that Mr Reilly had no direct involvement in the Appellant’s business at the relevant time and that he was not professionally qualified to comment on the Appellant’s activities. In our view the point is misconceived; Mr Reilly’s role was to investigate the Appellant’s claim and seek, where required, objective evidence in support of that claim. We found Mr Reilly’s evidence was reliable and credible in setting out the inquiries he had made and the basis upon which he had refused the claim due to a lack of evidence in support to verify either the activities or the expenditure involved. The case for HMRC was, in summary, to require the Appellant to demonstrate that the statutory requirements were satisfied. 233. Although the bundles contained a witness statement from Mr Hoy, a senior tax manager at Shorts Accountants within the R&D team, it was confirmed on behalf of the Appellant that the evidence was not relied upon and we therefore disregarded the statement in its entirety. 234. We found Mr Lowe’s evidence relating to the activities which formed the basis of the claim was vague and at times contradictory. We accepted that the passage of time may have affected Mr Lowe’s recollection of events, however we found the combination of factors such as inconsistencies, lack of detail and knoweldge on pertinent matters and Mr Lowe’s acceptance that elements of his witness statements may be inaccurate undermined the reliability of his evidence as a whole. 235. We treated the MSC Report with caution; no evidence was led from the author and the contents of the Report were therefore untested. Furthermore, the Report expressly stated that verification of the contents was the responsibility of the Appellant and not MSC and there was no evidence to show or explain what underlying source documents were used or how they were used to compile the Report. 236. We found the invoices and evidence relating to Mr Marshall was unclear; many did not refer to specific job numbers and others failed to adequately identify or apportion the specific activities involved which were said to constitute R&D. Mr Marshall did not give evidence and although we accepted that Mr Lowe had spoken to him we found Mr Lowe’s attempts to clarify were vague and unclear. We were left with estimates of expenditure which the Appellant did not, with any clarity, apportion to R&D activities. There was no clear explanation as to the basis of the estimates, how they related to activities which directly or indirectly contributed to achieving an advance in science or technology and what the costs specifically related to. In the absence of documentary evidence or cogent oral evidence we agreed with the submissions of HMRC that the Appellant’s figures and estimates simply could not be verified and there was no basis upon which we could be satisfied that they were reliable or even reasonable. 237. In summary, in assessing whether the Appellant’s activities amounted to R&D we concluded that in respect of all save the marine gears project the Appellant failed to identify the objective sought to be achieved, namely the scientific or technological uncertainty, the plan or method by which the Appellant sought to overcome the uncertainty and the overall advancement sought (whether or not achieved). There was no cogent evidence to show that there was any planning involved or that the Appellant worked independently to achieve a solution; to the contrary in a number of cases the evidence indicated that the Appellant was working to a pre-existing concept within parameters set by the customer. There was no evidence beyond Mr Lowe’s assertion that the activities were novel or innovative and even where this assertion was made Mr Lowe accepted in relation to some of the activities that the concepts may well have existed already. Even if the Appellant’s activities were novel, there was still no evidence to demonstrate that the outcome sought to advance overall knowledge in the field or that the challenge went beyond those to be expected in day to day activities. The Appellant’s evidence did not demonstrate who was engaged in or how they contributed to specific R&D activities. 238. Even if we are wrong in our value judgment of the activities relied on in support of the R&D claim, we considered the evidence relating to expenditure wholly inadequate. There was no clear evidence setting out how the figures were calculated. By way of example, the MSC Report made clear that assumptions had been made and that responsibility for verifying the figures rested with the Appellant yet the evidence of Mr Lowe indicated that he had made no attempt to do so but instead had relied on MSC. Mr Lowe’s assertion that he expected that MSC had considered and excluded any subsidised expenditure was not borne out by the evidence and the incorrect inclusion of items such as Mr Lowe’s bonus further undermined the reliability of the figures. The information from Mr Marshall was confused and Mr Lowe’s attempts to explain did not leave a clear picture or a reliable basis in support of the figures, for example his vague assertion that Mr Marshall’s documents were likely to be accurate. The absence of underlying documents to support the claim did not assist the Appellant, for instance in relation to consumables, staff hours and Mr Lowe’s hours which we were told came from his diary which was not produced. Furthermore, we did not accept the Appellant’s submission that the figures should be accepted as reasonable in the absence of evidence to the contrary; the burden of proof lay with the Appellant and we found that there was no evidence to demonstrate or support the basis upon which the figures were put forward. We also rejected the Appellant’s submission that there was no challenge by HMRC to the figures provided in relation to staff hours and consumables; it was clear that part of HMRC’s reasons for refusing the claim was that the figures could not be verified and their refusal to accept the figures formed part of its case. 239. The observations and principles set out in BE Studios informed our approach and we found the following comments in relation to the predecessor DTI Guidelines were applicable to the evidence in this appeal (at [23]): “… 9. Identifying the boundary between R&D and non-R&D activities can sometimes pose practical difficulties. But an activity will be R&D if carried on in the field of science or technology and undertaken with a view to the extension of knowledge. 10. R&D is thus characterised by work which breaks new ground and the novelty of what is being created in an atmosphere of scientific or technological uncertainty, and if successful will result in the extension of scientific or technical knowledge (although it is recognised that R&D will not always be successful). R&D should be founded on the investigation and exploitation of a scientific principle. This may be in pursuit of the creation or development of, for example, new liquids, substances, materials, software, designs, products, processes, technology or knowledge. R&D may result in intangible as well as tangible outputs. 11. Within this context, activities will be R&D if they consist of: the application of new scientific or technological principles in an existing area of investigation; or the application of existing scientific or technological principles in a new area of investigation. 12. Care must be taken to distinguish R&D from other activities that may be part of the wider innovation process. R&D will not include activities based upon the use of well-established products or processes, which may be new to the user but do not represent any departure from common knowledge or practice for the industry sector concerned. Neither will R&D include any activity that is not intended to lead to a scientific or technical advance or which did not break new ground intended to lead to substantial improvement for the business's products, processes or services. 13. Experimental development falls within R&D, but commercial development, including pre-production development and product development is outside R&D. There may still be difficulties in distinguishing these activities. The basic rule is to look at the primary objective of the work undertaken. If the primary objective of the development is to test the viability of the R&D, or to make further technical improvements on the product or process, then the work comes within the definition of R&D (subject to the basic requirement that R&D has to include an appreciable element of novelty). On the other hand, further development is not R&D if the product, process or approach is substantially set, or the technological uncertainty has been resolved, even though the development may be related to the design or bringing on of a product. Similarly, pre-production planning, or work to get a production or control system working smoothly is not R&D. Thus, R&D would include novel work which draws on or creates a new source of knowledge which might lead to the breaking of new ground or a technical advance and which might subsequently entail the creation or development of a new or substantially improved product, process or service. 14. This means that work on the periodic updating or modification of a product will not be R&D if it does not involve an appreciable element of innovation and does not break new ground. However, a programme of R&D may result in incremental improvements to a product, service or process.” 240. We note that in the relevant periods a minimum of £10,000 of qualifying R&D expenditure was required. As we were invited to provide a decision in principle only we have not addressed the threshold issue in any detail; the parties will have the opportunity to make further representations in due course if necessary once the issue of quantum has been considered in light of our findings. 241. Having set out our general observations and findings we now turn to deal with each of the activities forming the basis of the Appellant’s claim for R&D relief. The Appellant’s activities 242. The Appellant confirmed that the original claim for “General R&D” was no longer pursued and we therefore disregarded the evidence relating to this aspect of the claim. Marine Gear Welding 243. This claim fell within the period 2008-2009 and totalled £49,704 comprising: (1) £46,104 staff costs; (2) £3,000 heat and light;

[12](3) £600 non-destructive testing .244. The Appellant was approached to manufacture a gear for a nuclear submarine to a prescribed procedure which was provided. The Appellant completed the task to the designated specification and received payment of £10, 695 shown in an invoice dated 27 February 2009. The Appellant accepted that this element was not R&D and £11,000 costs had been excluded for that reason. As explained by Mr Lowe and the MSC Report the prescribed procedure was unsuccessful due to cracks adjacent to the welding

245. The evidence of Mr Lowe was that the Appellant developed the solution at its own expense. We found that there was limited information provided by the Appellant who explained in writing that:

“This work is classified and should you wish to investigate further we would have to obtain clearance from the MOD, as it is a protected classified product” which we noted had also been stated at a meeting with HMRC on 16 May 2013. 246. We noted Mr Firth’s submission that HMRC’s suggestion that the marine gears project may not even have taken place had not been pleaded nor had dishonesty. As we understood the submission, HMRC did not go as far as the Appellant believed and were not suggesting that the activity did not happen; rather the point was made simply to highlight the absence of documentation to support when and how the activities took place. 247. The only documentary evidence in support of this project is the sales invoice dated 27 February 2009. No terms of engagement for the period after the initial failure were provided. There was no documentary evidence of expenditure beyond the original attempts to weld to the specification provided and no documents setting out terms of engagement, payment, or correspondence between any parties such as the customer or the Welding Institute. 248. As to whether the claimed expenditure would satisfy the definition of R&D at parts 3 - 5 of the BIS, we found that Mr Lowe’s oral evidence provided additional detail and clarification of the activities undertaken. We considered the definition of a “project” and concluded that while we would have expected some documents recording the processes and planning of the activities, the absence of such was not determinative of the issue. Mr Lowe’s oral explanation of the involvement of the Welding Institute together with the detail of the activities carried out by the Appellant were in our view, on balance, sufficient to demonstrate that there had been a plan designed to reach the outcome sought and were therefore sufficient to constitute a project as required by the BIS. 249. We were also satisfied that the evidence set out in the MSC Report, when taken together with the evidence of Mr Lowe regarding the involvement of the Welding Institute who were unable to provide a solution and gave assistance to the Appellant supported the Appellant’s evidence that such welds had not been successfully carried out before despite attempts by other companies and indicated to us that the problem constituted a scientific or technological uncertainty in respect of which the solution was not readily deducible (per paragraph 13 of the BIS Guidelines). We also accepted Mr Lowe’s evidence that in conducting the work, they sought to advance overall scientific or technological knowledge in the field as per para 6. 250. We noted that there were inconsistencies in Mr Lowe’s evidence regarding the involvement of the Welding Institute. Mr Lowe asserted in his first witness statement that he made the information available to the Welding Institute to be shared more widely which he subsequently clarified in his second statement to explain that: “TWI now know that we have this knowledge”

. However, despite the inconsistency we concluded that the evidence was sufficient to find that BIS Guidelines satisfied. 251. In relation to the amount of expenditure qualifying HMRC submitted that only a fraction of the expenditure claimed would qualify as R&D. The schedule showed a number of rows of expenditure. We found that rows 2 to 22 totalling £27,913.58 constituted welding and testing of the original specification rather than seeking to resolve a scientific or technological uncertainty and therefore were not allowable. Although Mr Lowe’s witness statement asserted that no R&D was claimed on initial attempts, we were satisfied that this is contradicted by the schedule and that this expenditure should not have formed part of the claim. 252. HMRC submitted that the schedule of costs implies that the Welding Institute had a more significant role than claimed by Mr Lowe and it appeared that the Institute was fundamental in directing the Appellant to the solution therefore the activities were no more than testing by a competent professional and readily deducing the solution from information made available by TWI. However, having accepted the evidence of Mr Lowe we took the view that this was not a reasonable inference to draw and we rejected HMRC’s submission. 253. Rows 34 to 41 totalling £9,823 relate to the manufacture and finishing of the actual gear after a solution had been found. We agreed with HMRC that these activities related to the production of a product rather than an activity that seeks to resolve a scientific or technological uncertainty which would already have been resolved and therefore did not meet the definition of R&D under paragraphs 3 - 5 of the BIS Guidelines and the R&D would have ended (see paragraph 34 of the Guidelines). 254. We found, on balance, that Mr Lowe’s evidence relating to materials, staff time and other expenses was clearer than that in relation to the other projects perhaps, we inferred, as a result of a greater degree of involvement in this project, and we accepted it despite the absence of documentary evidence in support. 255. A further issue arose regarding Mr Lowe’s bonus which the Appellant conceded. Consequently, we were satisfied that the quantum of the claim was incorrect and required adjustment. 256. Turning to the application of s1052 CTA 2009, in relation to condition C the Appellant submitted that the details of the project were classified and that there was no patent. The stature requires that:

“any intellectual property created” is vested in the company. We concluded that there was no material before us upon which we could be satisfied that any intellectual property was created and in those circumstances the Appellant did not fall foul of condition C. 257. Although HMRC’s initial position was that the project may not satisfy condition D, the argument was not robustly pursued, Mr Priestley conceding that if the Tribunal accepted Mr Lowe’s evidence the Appellant could not be deemed to have been acting as a subcontractor. For the reasons set out above, we accepted in respect of this project that Mr Lowe’s evidence was clearer and more detailed than in relation to the remaining activities and we accepted that the Appellant had continued with the project independently and without subsidy. We were therefore satisfied that conditions D and E were met. Double decker loader 258. The claim totalled £152,411 of which £151,709 was attributed to 2009 and £702 to 2010 and comprised: (1) £68,052 staff costs in 2009; (2) £36,482 steel and consumables in 2009; (3) £47,175 subcontractor costs paid to Mr Marshall in 2009; and (4) £702 staff costs in 2010. 259. We found Mr Lowe’s evidence in respect of these activities vague and contradictory. Mr Lowe explained that the Appellant was approached by Transdek with a request to design a product which met certain criteria. The invoices provided covered design work calculated by reference to the number of design hours, it appears at an hourly rate, the supply of actual products such as a “cage lift” both early and subsequent versions, modified versions and other modifications. The invoices also refer to the “cage lift…as per our discussion with Mark Adams”. 260. There were no technical drawings of the product developed. The MSC Report described “special lifts in loading bays to enable the pallets to be lifted to the upper deck” of double deck lorries and the replacement of existing scissor action lifts which created issues with “mechanical insufficiency” and “substantial civil engineering” to install. One challenge described related to “the standard dimensions of loading bays”

. However, Mr Lowe described a different product “which maximised the floor space” within a lorry by creating “2 floors”. For the first time when giving oral evidence Mr Lowe described the key advance as being the manipulator. 261. We concluded that Mr Lowe’s evidence was unclear and unreliable. We formed the view that the inconsistencies in Mr Lowe’s evidence were due to his limited involvement in the project; as he stated in oral evidence Mr Marshall developed the product with little involvement from Mr Lowe. Mr Lowe accepted in cross examination that he only became aware of the inaccuracies in his evidence when he received the patents a few weeks prior to the hearing and had to explain them to his representative. He stated that the patents were technical and would not be understood but agreed that the lift concept already existed. 262. In relation to the amount of expenditure qualifying, we accepted HMRC’s submission that the design and material costs of production are included without any attempt to identify those elements that directly contributed to resolving a scientific or technological uncertainty. 263. We agreed with HMRC that the absence of purchase invoices in relation to the steel and consumables make the expenditure unverifiable. We did not accept the arguments for the Appellant that the amounts can be quantified by looking at the project; the burden rests with the Appellant to substantiate its claim and we found that there was no clear basis for the figures provided. 264. Mr Lowe described the creation of a prototype which was subsequently modified to “hone and enhance the project”. He stated that improvements were then “incorporated into the later produced units”. Sales invoices show that design work appeared to be substantively completed by end of December 2008 with the subsequent invoices relating to “delivery of a cage lift” and subsequent design work then referred to in the sales invoices as “modifications”, “improvements” and “revisions” which are excluded by paragraph 14 of the BIS Guidelines and yet appear to have been claimed. 265. There was no evidence, oral or documentary, from which we could be satisfied that the activities were conducted as a project. As set out above, records or similar documents would be expected, albeit not determinative. In the absence of documentary evidence, the oral evidence of Mr Lowe fell far short of demonstrating that there was any plan or methodology formulated or followed. Furthermore, the evidence failed to identify with any certainty or clarity the scientific or technological uncertainty sought to be resolved; to the contrary the patents predating the Appellant’s involvement and Mr Lowe’s own evidence of similar products indicated that any scientific or technological uncertainty had been overcome. 266. We considered whether the activities constituted an appreciable improvement. The product may have been bespoke and even innovative however the invoices which refer to “designs” and “drawings” did not provide any indication as to how the activities went beyond a competent professional readily deducing a solution and producing a design. Furthermore, the documentary evidence taken together with that of Mr Lowe also failed to explain how the activities made a material change or advance in science or technology as a whole and in those circumstances, we could not be satisfied that the BIS Guidelines were satisfied. 267. Whilst we accepted that Mr Lowe’s experience of engineering was sufficient to deem him a competent professional in general terms, the difficulty was that Mr Lowe did not give cogent evidence about the detail of the activities and we concluded, when considered together with the fact that Mr Marshall had been responsible for the design, that Mr Lowe had only a limited knowledge of the activity and his evidence was insufficient to demonstrate that the requirements of the BIS Guidelines at 3 - 13 were met. 268. We noted HMRC’s submissions in relation to this and other projects involving Mr Marshall, namely that it was Mr Marshall who was the competent professional who could speak to the activities. The fact is that Mr Marshall did not give evidence and we make no observations as to what evidence he may have given or its potential relevance. We have reached our decision on the material before us and for the reasons set out above we concluded that the statutory requirement are not satisfied. 269. The Appellant attributed all of Mr Marshall’s invoices for 2009 to this project despite a coding system which appeared to allocate some of the costs to other projects. We found the Appellant’s evidence unclear in explaining the coding system and how any costs beyond the sum of £8,534.50 (which we accepted as correctly identified by HMRC as attributable to the code for this project) were attributed to this project and specifically any R&D activities. We concluded in the absence of any clear evidence that the Appellant’s figures could not be relied upon as accurate. 270. Turning to the application of s1052 CTA 2009 Condition C, HMRC produced evidence from the Transdek website showing the double deck lifts it offers for sale and patents belonging which suggest the intellectual property rights belonged to Transdek. Although the Appellant asserted that the patents related to different products, we found Mr Lowe’s evidence was no more than an assertion with no cogent explanation as to how the products differed and we inferred from the pre-existing patents together with the invoices for design “as per discussions with Mark Adams” of Transdek who is named on the patents as inventor that the Appellant was approached by Transdek who provided the concept. 271. The patents exhibited were as follows: · European patent 1775246 filed on 4 October 2006 which makes reference to double-deck trailers and notes the limitations of mechanisms incorporating "scissor lifting” and the need for civil engineering or “excavation work” prior to installation; · European patent 2025635 filed on 16 August 2007 which described “Apparatus including a moveable platform…The platform is moved by using a single ram, thereby avoiding the expense of the conventional multiple ram or scissor lift arrangements…” · United States patent 8978830 filed on 27 April 2010 but with priority to GB application 0907333 (J48) which was filed on 29 April 2009. The US patent describes the invention as “lifting apparatus of a type which can be used to allow movement of goods to and from and between first and second goods storage areas…with the other goods storage areas typically being a vehicle trailer.” · European patent 2246280 which appears to be the European version of the US patent with the same GB reference as above. · Google Patents show an abandoned US patent application which shows Transdek as the current assignee and Mr Adams as inventor. It was filed on 26 October 2010 with a priority given to a GB application filed on 26 October 2009 which relates to “locking assembly for lifting apparatus”. 272. We concluded from the evidence before us that the Appellant was subcontracted to provide a solution as opposed to independently developing a product. The Appellant’s evidence was that it was provided with parameters but developed the product at its own risk. However, we found that this evidence was contradicted by the sales invoices which show that the Appellant was reimbursed on an hourly basis for its design time. Taken together with our finding that Mr Lowe’s knowledge of the project was limited and his evidence regarding figures and payment, we concluded that the customer provided the concept of the product and was heavily involved in the design which was then implemented by the Appellant and which amounted to the Appellant being subcontracted, thereby failing to satisfy condition D. Furthermore, the documentary evidence suggest that the Appellant was fully recompensed for its time in developing product and prototypes therefore condition E was not satisfied. Hollow Ingot Manipulator 273. This element of the claim totalled £121,535 of which £37,256 was attributed to the 2009 year and £84,279 to 2010 and comprised: (1) £13,256 staff costs in 2009; (2) £24,000 subcontractor costs (Atkins Bennett Ltd) in 2009; (3) £24,553 staff costs in 2010; (4) £59,726 steel and consumables in 2010. 274. As to the existence of expenditure, we accepted the submissions for HMRC that without purchase invoices for the steel and consumables, the expenditure cannot be verified as required by s1044 CTA 2009. Furthermore, it remains unknown how staff days were attributed specifically to the project as required by s1124 CTA 2009. We rejected the Appellant submission that there was no real challenge to these factors; HMRC had sought information from the outset of the enquiries to substantiate the claim which had not been provided and the absence of which had formed part of HMRC’s refusal of the R&D claim. In our view, neither the documentary nor oral evidence provided sufficient or clear information from which we could conclude that the Appellant’s claims in this regard were accurate or reliable. 275. The evidence of Mr Lowe was unpersuasive; his assertion that the product amounted to R&D simply because no “off the shelf product” was available to the customer is wholly insufficient to demonstrate that there was an advance to overall knowledge in science or technology or any uncertainty the solution to which was not readily deducible by a competent professional working in the field using existing knowledge. 276. There was also no evidence upon which we could conclude what, if any, plans or processes were used to arrive at the solution. The invoices from Atkins Bennett Ltd are for “Engineering” services for the “Design of Billett Turnover Unit for Forgemasters..C-Frame Ingot Lift” which led us to conclude that Atkins Bennett were commissioned to draw up plans for a specific product after some engagement with the customer and which therefore does not amount to R&D. We noted HMRC’s submission that the relevant competent professional was Atkins Bennett; for the reasons set out above in relation to Mr Marshall we make no findings in that regard nor did we consider what evidence Atkins Bennett could have provided. The difficulty for the Appellant is that in our view the evidence on behalf of the Appellant, in particular that of Mr Lowe, was vague, unsupported by documentation and failed to provide the detail required to satisfy the BIS Guidelines. We found that the Appellant failed to demonstrate that the product constituted an advance in overall science or technology or that resolution of any such uncertainty was resolved by it. 277. We found that the Appellant failed to address which parts and how those parts of the expenditure claimed were attributable to R&D. By way of example an email dated 2 December 2008 indicated that any scientific or technological uncertainty that may have existed had been resolved by that date as a product to a specific design was offered for sale. In those circumstances we concluded that Mr Lowe’s time for December 2008 to February 2009 and 2010 could not constitute qualifying expenditure for R&D activities. We also concluded that there was no clear evidence, documentary or oral, which demonstrated that the basis of the Appellant’s claim for expenditure on staff and consumables was reliable. 278. Turning to the application of s1052 CTA 2009, the product was designed by Atkins Bennett and sold to the Appellant’s customer Sheffield Forgemasters. There was no evidence regarding the terms of the engagement and no basis upon which we could conclude that any intellectual property rights were created. 279. In relation to condition D the evidence in our view demonstrated that the Appellant was commissioned to provide a bespoke solution. There was no cogent evidence to support the assertion that the Appellant bore any risk in these transactions; to the contrary, we were satisfied that design time was invoiced. We noted the evidence adduced by HMRC, namely a news article entitled “World Nuclear News” by World Nuclear Association dated 25 November 2010 which attributed the new process of forging hollow ingots to Sheffield Forgemasters:

“Sheffield Forgemasters of the UK has announced the successful conclusion of casting trials of a pioneering hollow steel ingot, which could help the company capitalise on key power generation sectors, including nuclear energy.” 280. In the article Sheffield Forgemasters refers to the time and investment into its research and development facility. The head of the R&D department described the challenges as relating to the forging process: “Establishing the correct parameters for a casting of this kind are highly complex and require processes such as finite element analysis and casting solidification modelling to achieve tangible results.” 281. In addition to the article indicating that Sheffield Forgemaster was responsible for the R&D activities, the oral evidence of Mr Lowe was that the Appellant was not in fact involved in the forging aspect. In assessing all of the evidence before us, we could not be satisfied that the Appellant’s involvement amounted to R&D rather than, for example, involvement in a wider commercial project with no contribution to the scientific or technological uncertainty (see para 19 BIS Guidelines). Furthermore, we concluded that the Appellant’s work was subcontracted and is therefore excluded by Condition D. 282. We also concluded from the documents that the Appellant was reimbursed for the design costs plus the costs of building and supplying both the prototype in 2009 and subsequent product in 2010. In those circumstances we were satisfied that condition E was not satisfied. Trombone Walkway Gantry 283. This element of the claim totalled £2,931 all attributable to staff costs in 2009. 284. Mr Lowe’s witness statement explained that the Appellant was asked to design “an innovative moving platform to allow operatives to get close to a 105 tonne ladle of molten metal” which was an “untried process”

. We found the evidence on behalf of the Appellant was vague and did not demonstrate that there was any scientific or technological uncertainty. Mr Lowe’s evidence highlighted that the activity related to a moving platform with a “soft start and increasing speed mechanism”. However, there was no clear evidence to demonstrate or upon which we could conclude that there was no such existing technological knowledge, the details of any scientific or technological uncertainty that the Appellant was seeking to resolve or advance the Appellant sought to achieve. On the material before us there was also insufficient evidence to establish that there was any methodology or plan used to resolve any uncertainty such that it could amount to a project. Although the Appellant asserted that the product was “innovative” there was no explanation as to the basis of this assertion, for example any investigations carried out to ascertain the level of knowledge at the relevant time. We concluded that the evidence does not meet the requirements set out in the BIS Guidelines. 285. For the same reasons we found the Appellant’s evidence that its staff discussed possible solutions to arrive at an outcome was vague; there was no cogent evidence as to the nature of these discussions or how an outcome was arrived at. In those circumstances we could not be satisfied on the material before us that the solution was not readily deducible by a competent professional or that the activities constituted a project as envisaged by the BIS Guidelines. (BIS paras 14, 19 and 20). 286. Furthermore, we agreed with HMRC’s submission that the Appellant’s breakdown of staff costs which show a single staff day for Mr Lowe and a single staff day for “Andy Staton (Planner)” does not demonstrate or specify any R&D within the activity; rather it was the design and delivery of a bespoke engineering product to a customer. This is further supported by the sales invoices which are for the provision of drawings and subsequent provision of the product. We should also note that if this stands as the only remaining element of the 2010 claim, it does not meet the threshold at s1050 CTA 2009. 287. Turning to the application of s 1052 CTA 2009 we were satisfied that the activity was a direct commission subcontracted to the Appellant with no risk and in respect of which the Appellant was reimbursed for its expenditure. In those circumstances we were satisfied that any R&D activities that may have been involved were included in the commission and therefore subcontracted and subsidised contrary to conditions D and E. 5,000 Tonne Manipulator 288. This element of the claim totalled £29,070 all within 2010 and which comprised: (1) £10,577 staff costs; and (2) £18,493 for steel and consumables. 289. Mr Lowe explained that this activity involved the installation of a “new manipulator”. The initial challenges were the strength of the floor on which the manipulator was fitted. Mr Lowe stated the Appellant needed to “design, from scratch, a track that was significantly stronger” than the previous track. The invoice dated 23 December 2009 attributed £47,450 to “design, manufacture and install manipulator track for new press”. 290. The evidence on behalf of the Appellant failed to demonstrate that the activities sought to advance science or technology; there was no clear evidence as to what level of knowledge existed in relation to the strength of tracks at the time the Appellant carried out its activities nor how the Appellant’s activities sought to achieve an overall advance. There was no cogent evidence upon which we could conclude that there was any scientific or technological uncertainty nor what that uncertainty was regarding tracks of this strength (paras 6-11 BIS). 291. We agreed with the submission for HMRC that the challenge to the Appellant was in the design of a bespoke track that was stronger than its predecessor in an environment in which some of the parameters were not fully known at the outset. In our view this did not amount to a scientific or technological uncertainty as envisaged or required by the BIS Guidelines (paragraphs 13 - 14) but instead were uncertainties in relation to the working environment such as the strength of a particular floor and the exploration of such parameters did not amount to the advancement of overall scientific or technological knowledge in any field but rather to how the existing knowledge applied to the physical environment they were working in. We did not accept that the testing of the product due to unknown parameters supported the Appellant’s assertion that there was a scientific or technological uncertainty; the Appellant provided no detail about what the tests entailed or how they supported the assertion. In the absence of any cogent evidence beyond mere assertion we could not be satisfied that the solution was not readily deducible by competent professionals in the field. 292. In relation to the amount of expenditure qualifying, for the reasons we have set out earlier, the absence of purchase invoices in relation to the steel and consumables make the expenditure unverifiable. We found the Appellant’s submission that HMRC had produced no evidence to show that the figures put forward by the Appellant were unreasonable to be misconceived; the Appellant put forward figures but there was no documentary evidence to support them nor any details given to explain the basis of those figures. In those circumstances we could not be satisfied that the figures were reliable or that the claimed amounts were qualifying expenditure as required by the Guidelines. 293. Furthermore, we agreed with HMRC that even if there were scientific or technological uncertainty involved in strengthening the track, the costs of drilling to test the concrete floor and the vast majority of the costs of constructing and installing the product would not directly contribute to resolving that uncertainty (as per paras 4 and 5 of the BIS Guidelines) and therefore would not qualify as R&D expenditure. 294. As to the application of s1052 CTA 2009, we concluded that the Appellant was commissioned to design and fit the product into that specific customer’s working environment and therefore the work was subcontracted, and condition D is not met. We did not accept the Appellant, ‘The invoice produced indicates that the Appellant was reimbursed for its expenditure and we found therefore condition E was not satisfied. Tilting Wash-down system 295. This element of the claim totalled £13,570 in 2009 comprising: (1) £6,070 staff costs; and (2) £7,500 steel and consumables. 296. Mr Mr Lowe expanded on the “design challenge” in his second witness statement in which he referred to the:

“design challenge, and the technological uncertainty we had to resolve”

. There was a single sales invoice dated 31 July 2008 for £24,669.75. Mr Reilly identified that Mr Marshall appeared to have done some work on the project and seems to have been paid at least £4,623.75 in relation to it. 297. We found there was no detail which could lead us to conclude on the evidence that there was any scientific or technological uncertainty; the evidence of Mr Lowe was vague and failed to identify what any such uncertainty was beyond a design challenge arising from a specific customer request which, in our view, did not satisfy the requirements of the BIS Guidelines. Although Mr Lowe asserted that this type of challenge “had not been approached before” there was no evidence to demonstrate how he was aware of this, what enquiries had been made in that regard or why any novel approach amounted to seeking to resolve a scientific or technological uncertainty. There was also no evidence upon which we could be satisfied that any challenge could not be overcome by using existing technology or that the Appellant’s product advanced, or sought to advance, overall knowledge in the field of science or technology. 298. We considered the sales invoice which indicated to us that the Appellant’s customer commissioned the item with a pre-existing drawing. We found that this supported our finding that there was no scientific or technological uncertainty at the relevant time. 299. There was no detail or explanation as to what the “extensive research” entailed and we could not be satisfied on the vague assertions that the Appellant’s activities were conducted as a project or that they sought to make an advancement in science or technology. 300. We agreed with HMRC’s submissions that the subcontractor costs identified by Mr Reilly as relating to this project but claimed in relation to the double deck loader are also not allowable. 301. In relation to the amount of expenditure qualifying we noted that the sales invoice was dated 31 July 2008 however the Appellant claimed £2,852 staff costs in August 2008. We agreed with HMRC that it could be reasonably inferred that the prototype referred to by Mr Lowe had been delivered by the time of the sales invoice and that any further work was the “continued testing and development” referred to by Mr Lowe. On that basis we concluded that the further activities fell under the description of “improvements, optimisation and fine-tuning” at paragraph 14 BIS Guidelines and was not R&D. 302. As to the application of s1052 CTA 2009, in respect of Condition C it is unclear whether any intellectual property was produced and we therefore make no findings in this regard. 303. We were satisfied that the product was a bespoke commission from the Appellant’s customer and that the Appellant acted as a subcontractor. We did not accept the Appellant’s submission that it was only paid for a final product; Mr Lowe’s own evidence explained that the Appellant was engaged to design, manufacture and fit the product which we were satisfied encompassed any R&D activities that may have taken place. In those circumstances condition D was not satisfied. Furthermore, as the Appellant was fully reimbursed for the design and fitting of the product condition E was also not met. Animal Centrifuge 304. This element of the claim totalled £51,729.50 in 2010 comprising: (1) £704 staff costs; and (2) £51,025.50 subcontractor costs (John Marshall). 305. There was a sales invoice dated 26 November 2009 for £15,600 which stated:

“Draughtsman To supplying the services of a drawghtsman [sic] to detail to your instructions From 8.4.09 to 12.11.09 inclusive” 306. As we understood the position, the draughtsman was Mr Marshall. We considered the invoice together with the application filed by Agritech for a patent for a centrifuge to extract oil from food wastes on 24 October 2007 (with priority given to a previous UK application filed on 28 October 2006). Taken together with Mr Lowe’s evidence that Agritech believed that animal waste spun at the right speed and temperature would result in fat separation and retention, led us to conclude that the Appellant’s activities were not R&D but an order to design to specification a product based on existing scientific knowledge. 307. We considered that the patent applications did not support the MSC Report which claimed: “Being able to produce additional products of value from materials that had previously been disposed of was a revolutionary concept and the first of its kind” 308. In our view the concept involved already existed and was not, therefore, “revolutionary”

. Mr Lowe’s evidence failed to establish that the Appellant’s activities sought to resolve a scientific or technological uncertainty or to advance overall scientific knowledge in the field . We found, and indeed Mr Lowe accepted, that he had not worked on a product of this type before and it was clear to us from the evidence that Mr Lowe had insufficient in-depth knowledge of the technology or science involved or the processes followed. We also found Mr Lowe’s evidence inaccurate in that his written evidence indicated that the Appellant carried out the tests however he subsequently clarified in oral evidence that Agritech was responsible for the testing. We concluded that Mr Lowe’s knowledge and understanding in this field was not sufficient to amount to that of a competent professional nor did his evidence demonstrate that the product sought to achieve an overall advance by resolution of uncertainty in the field. 309. In our view, engaging the services of a draughtsman does not automatically constitute R&D; there was no evidence before us upon which we could conclude that this was no more than a competent professional reaching a solution from existing knowledge and in our view the evidence indicated that this was the case. There was also no evidence of how the draughtsman’s services met the criteria set out at paragraph 19 of the BIS Guidelines that the activities were “conducted to a method or plan”. 310. Regarding the amount of qualifying expenditure, there was no explanation as to how the Appellant incurred subcontractor expenditure of £51,025.50 claimed as being “principally” for this project. We were told that the single sales invoice dated 26 November 2009 for £15,600 did not relate to this project and that in fact the Appellant was not paid. However, this evidence strengthened our view that the records and figures put forward and relied upon by the Appellant were at best confused and at worst unreliable. 311. As set out earlier, the Appellant explained and we were satisfied that Mr Marshall’s work related to a variety of projects and not principally the animal centrifuge as claimed. In the absence of clear evidence demonstrating the work carried out in relation to specific projects and attributable to identifiable R&D we concluded that the BIS Guidelines were not met. We were also satisfied that there was no basis for allocating Mr Lowe’s time to this activity beyond 26 November 2009 and the Appellant’s suggestion that this work was honing the product would not in our view meet the BIS Guidelines (see paragraphs 14 and 34). 312. In relation to s1052 CTA 2009, we considered that the existence of a patent together with Mr Lowe’s evidence indicated that the Appellant was subcontracted to provide services based on detailed instructions of an existing concept and that if there were any R&D activities involved the Appellant was acting in the capacity of a subcontractor thereby not meeting the requirement of Condition D. Although we were told that the Appellant was not paid for its involvement, we were satisfied that the work had been contracted out for payment. The fact that the customer reneged on payment did not alter this fact. Any remedy in this regard lies outwith the scope of this appeal and this Tribunal and is a matter between the Appellant and his customer depending on the terms of their agreement, which was not provided to us. On the basis that no payment was received, Condition C would be met. Summary 313. For the reasons set out above we allow the appeal in part. We consider that the claim relating to the marine gears project satisfies the legislative requirements for R&D relief in principle. However, we have concluded that the quantum of the claim is incorrect and the parties should use best endeavours to reach agreement on the correct amount of the claim. If the parties are unable to reach agreement they must request a further hearing for the issue of quantum to be determined. 314. In relation to the remainder of the claim we dismiss the appeal. Right to apply for permission to appeal 315. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JUDGE J DEAN TRIBUNAL JUDGE RELEASE DATE: 10 OCTOBER 2020

Hadee Engineering Co Ltd v Revenue & Customs (CORPORATION TAX - Research and Development) [2020] UKFTT 497 (TC)

Cited in 5 later judgments