“Subsidised expenditure (1) For the purposes of this Part a company’s expenditure is treated as subsidised - (a) if a notified State aid is, or has been, obtained in respect of - (i) the whole or part of the expenditure, or (ii) any other expenditure (whenever incurred) attributable to the same research and development project, (b) to the extent that a grant or subsidy (other than a notified State aid) is obtained in respect of the expenditure, (c) to the extent that it is otherwise met directly or indirectly by a person other than the company. (2) In this section “notified State aid” means a State aid notified to and approved by the European Commission. (3) For this purpose the following are not State aids – (a) relief under this Part, (b) R&D tax credits under this Part, and (c) R&D expenditure credits under Chapter 6A of Part 3 (4) For the purposes of this Part a notified State aid, grant, subsidy or payment that is not allocated to particular expenditure is to be allocated to expenditure of the recipient on a just and reasonable basis.” (Emphasis added.)
“There is no contractual provision or mechanism for correcting erroneous rates or unit prices in the Contract Bills or other Priced Document and those rates and prices will continue to form the basis for any valuation of work of a similar character under the Valuation Rules.”
“Ultimately, we are engaged to restore a building with any necessary or desired changes to the existing building to be achieved e.g new fire systems or a lift where there was none. We seek to make a profit out of this or else there would be no point in doing what we do. The client is interested in the result and expects us to take responsibility for it. The costs in delivering that is for our account. We charge based partly on cost but the expenditure is very much ours.”
“Expenditure shall not be regarded for any of the purposes of this Part of this Act as having been incurred by any person in so far as it has been or is to be met directly or indirectly by the Crown or by any government or public or local authority, whether in the United Kingdom or elsewhere, or by any person other than the first-mentioned person”. (2)Section 50 of the Taxation of Capital Gains Act 1992 provides that: “There shall be excluded from the computation of a gain any expenditure which has been or is to be met directly or indirectly by the Crown or by any Government, public or local authority whether in the United Kingdom or elsewhere.” (3)Section 532 of the Capital Allowances Act 2001 provides that: “For the purposes of this Act, the general rule is that a person (“R”) is to be regarded as not having incurred expenditure to the extent that it has been, or is to be, met (directly or indirectly) by (a) a public body, or (b) a person other than R.” (4)Section 603(1) of the Income Tax (Trading and Other Income) Act 2005 provides that: “For the purposes of section 585, 588 and 600, the general rule is that a person (“A”) is to be regarded as not having incurred expenditure so far as it has been, or is to be, met (directly or indirectly) by - (a) a public body, or (b) a person other than A.” (5)Section 172(1) of the Income Tax (Trading and Other Income) Act 2005 provides that: “Expenditure is excluded for the purposes of section 170 so far as it has been, or is to be, met (directly or indirectly) by - (a) the Crown, (b) a government or local or other public authority (whether in the United Kingdom or elsewhere), or (c) any person other than the person incurring the expenditure.”
“If a shoemaker agrees to make a pair of shoes, he cannot offer you one shoe and ask you to pay one half of the price.”
“Expenditure shall not be regarded for any of the purposes of this Part of the Act as having been incurred by any person in so far as it has been or is to be met directly or indirectly by the Crown or by any government or public or local authority, whether in the United Kingdom or elsewhere, or by any person other than the first-mentioned person.” (3) The contention of the Crown was that the taxpayer did not incur the expenditure on the relevant property development because a merchant bank, F, had agreed to finance the project. Although the precise nature and terms of the financing was not clear Harman J proceeded on the basis that there was a form of mortgage arrangement in place. The taxpayer argued as follows, as set out at 413 e and f: “...because the taxpayer agreed to provide a substantial asset as valuable consideration to [F] it could not be said as a matter of English language that [F] had 'met directly or indirectly' the expenditure on the development. He argued that the payments by [F] of the taxpayer's liabilities on the architect’s certificates were no more than loans by [F]. The making of loans to 'A' cannot be said to be the meeting of 'A's liabilities; the loans merely provide the wherewithal for 'A' to meet his liabilities. The satisfaction of these loans by the transfer of an asset does not change the nature of the loans at the time they were made, and is merely a way of paying off debts. The transfer of the asset does not mean that the transferee has 'met' the expenditure which was the consideration for the agreed transfer.” (4) Harman J commented that the taxpayer undoubtedly bore risk as regards the expenditure and the financing such that there was a genuine incurring of the expenditure as follows at 413 g to 414 a: “It is clear on the facts that the taxpayer undoubtedly bore the risk of the cost of the development had there been an overrun in the cost-and, heaven knows, the courts have seen examples enough of overruns in English building contracts in the last 20 years. The excess of cost over the limit of the moneys which [F] was liable to provide was entirely to the taxpayer's account. Again, that money might well have been provided on a temporary basis by [F], but that money, according to the [F] agreement, would have had to be repaid by the taxpayer to [F] in addition to the procurement of the grant of the headlease by Maidenhead Corporation on the direction of the taxpayer to [F]. Further, the taxpayer undoubtedly bore the risk that if the development were delayed in completion-another matter which was certainly a real risk in England at the time this development took place-it would have to bear the whole cost itself by repaying all the advances to [F] and would not be able to satisfy the advances by procuring the grant of the head lease to [F]. It seems to me that the truth of this matter was that, although the financing arrangements were somewhat odd, there was a genuine incurring of the expenditure by the taxpayer, who was at risk of having to repay the loans, the advances, made from time to time by [F] by payment of the expenses, and that had any event occurred which prevented the taxpayer from procuring the grant to [F], eventually, of the headlease, plainly and beyond any question the taxpayer would have been liable to repay [F] all the moneys advanced.” (5) He concluded, at 414 a, that in those circumstances it was “impossible to say that the moneys advanced by [F] were in any genuine sense of the words being paid for the work done”: “Those payments, at the time they were made, were undoubtedly, in my judgment, loans. The loan was discharged by the procuring of the grant of the headlease. In no proper sense did [F] 'meet' the taxpayer's expenditures. In my judgment the taxpayer's argument is right.” (6) He said that this accorded with the policy of s 84 in the following passages at 414 b to d, which Quinn particularly relies on: “The section's reference to meeting the expenditure of another is one which is plainly primarily directed to cases of government grants or local authority contributions and such matters. It includes the reference to expenditure being met 'by any person other than' the taxpayer, but that is a tail piece thrown in to catch any other such meeting of expenditure. The concept as it seems to me of that whole subsection is of the provision of money to meet expenditure by way of, in effect, bounty. 'Bounty' may be an inappropriate way to describe the grants made by a government department, remembering that the government have no money save what they take from taxpayers and then give back to other taxpayers. Nonetheless, it seems to me that a transaction whereby a financier lends money to meet a taxpayer's bills and as a result a valuable asset is transferred from the taxpayer to the financier is not appropriately described as the financier 'meeting' the expenditure of the taxpayer. He has bought an asset, paid for an asset, or whatever other phrase of the English language one may care to use, but he has not, in my judgment, met the expenditure of the taxpayer in any proper use of that term in the context in which it appears.”
“The ordinary meaning of “grant” is “a gift or assignment of money by government or public authority out of public funds to a private or individual or commercial enterprise deemed to be beneficial to the public interest (GTE Sylvania Canada Ltd. v R [1974] 1 FCR 726 at p. 736 per Cattanach J. in the Federal Court of Canada)...” (3) It is plain, therefore, that a “subsidy” or “grant” has to involve an element of bounty or something akin to that albeit that the relevant funds usually may be provided in the public or general interest. The same must be true of state aid. It is notable that: (a) In each case, to fall within ss 1138(1)(a) or (b) the “subsidy”, “grant” or “state aid” has to be “obtained in respect of “the relevant expenditure. In other words, it has to be earmarked for a purpose. (b) Expenditure is treated as subsidised under s 1138(1)(a) if “state aid” is obtained in respect of the whole or part of the expenditure whereas expenditure is treated as subsidised under s 1138(1)(b) only to the extent that the “grant” or “subsidy” is obtained in respect of the expenditure. Overall, the wording suggests that a payment for no consideration to meet a particular expense falls within ss 1138 (a) and (b) whereas a payment made to acquire goods or services, is plainly not caught. (4) Read in context, therefore, the reference in s 1138(c) to expenditure which is “otherwise met” means expenditure which does not fall within ss 1138(a) or (b) but which, broadly, is funded for no consideration or is akin to a “grant” or “subsidy”. Certainly, it would be odd for s1138(1)(c) to be given such a radically different meaning, as is the effect of HMRC’s interpretation, that it would capture payments made by a third party for the acquisition of an asset under a profitable commercial contract. (5) It is also notable that the purpose of the predecessor to s1138(1)(c), contained in para 19 of schedule 20 of theFinance Act 2000 , is explained in a consultation document published prior to its enactment at note 19 as follows: “Sub-paragraph (7) provides that the expenditure must not be “subsidised”
“An authoritative bestowal or conferment of a privilege, right, or possession; a gift or assignment of money, etc. by the act of an administrative body or of a person in control of a fund or the like.” (b) A “subsidy “means: “A donation of money or other property, usually made to provide assistance.”
“In the first place, what we must consider is not the measure by which the amount of compensation was arrived at, but what it was truly paid for…” (b) A similar distinction was drawn by the Court of Justice of the European Unition (“CJEU”) in the decision in Lisboagas GDL - Sociedade Distribuidora de Gas Natural de Lisboa SA v Autoridade Tributtaria e Aduaneira[2015] STC 1966 . This is a VAT case concerned with whether Lisboagás had incurred land use tax where it subsequently recovered that cost under a broader commercial contract under which the tax formed a constituent expense of services provided by Lisboagás. The CJEU explained why Lisboagás rather than a third party had incurred the land use tax at [33]: “Moreover, in passing on the amount of the land use taxes to the company responsible for marketing the gas when it bills that company for the use of those infrastructures to supply gas to consumers, Lisboagás passes on not the land use taxes as such, but rather the price of using publicly-owned municipal property. That price is part of the set of costs borne by Lisboagás which in turn forms part of the price for its supply of services to be paid for by the company responsible for marketing the gas. The fact that, under the concession agreement, the amount of the land use taxes is listed as a separate item in the invoice issued by Lisboagás then in the invoices issued by the company responsible for marketing the gas to consumers is irrelevant in that regard.” (c) Accordingly, it is wholly irrelevant to the analysis that Quinn factors in its costs in agreeing the price for “Works” and whether the Clients see the basis on which Quinn has worked out the price (as they may do through the tender documentation): (i) Any commercial entity aims to ensure it can recover its costs when pitching for work. That says nothing about what its clients pay for when paying the agreed price. The basis on which Quinn has charged the initial fixed price is relevant to the Client in that (A) if the scope of the “Works” changes because the Client changes its mind as to what it wants, as can happen on a big construction project, Quinn is entitled to further payment for the additional work, and (B) the JCT contract requires this further payment to be in line with the methodology used to derive the initial price. However, that does not alter the fact that what the Client pays for is the finished product. (ii) Indeed, the evidence shows that the costs which Quinn factors in in agreeing a price do not necessarily correspond with the costs which are in fact incurred. As Harman J noted in Costain v Stokes, the risk of cost overruns is hardly new to the construction industry. Mr Wells’ evidence demonstrates that Quinn’s position is no different to any other builder in this respect. The fundamental point is that the manner in which a payment is calculated does not necessarily indicate what the payment is for. (3) The use of the term “indirectly” in s 1138(1)(c) does not mean that the tribunal is to engage in an economic analysis of whether costs have been recovered: (a) The plain meaning of “meeting” expenditure is not expanded by the word “indirectly” in the legislation. The two modes of meeting expenditure differ only in terms of the route through which payment is made. This is explained in Cyril Lord Carpets Ltd v Schofield 42 TC 637 per Lowry J at 643: “The Company admits that one can meet expenditure directly by paying the creditor, and indirectly by paying the taxpayer, the amount which the taxpayer has to lay out.” (b) Nothing in the “indirectly” language alters the meaning of “meeting” expenditure. That point is reflected in Stokes v Costain cited above where the indirectly language was also present. The words “directly or indirectly” are capable of modifying the meaning of the verb to which they attach only so far as is linguistically possible (see Potts’ Executors v Commissioners of Inland Revenue[1951] AC 443 ); they cannot enlarge the meaning of the verb beyond this point. There is not an “indirect” meeting of expenditure where the purpose of the payment is anything other than the incurring of the expenditure. Indeed, it is understood that HMRC accept that the phrase “directly or indirectly” pertains to the mechanism by which the expenditure is met and does not qualify the concept. (4) HMRC’s analysis is wholly unworkable: (a) Every company or business which incurs expenditure is invariably externally funded assuming some commercial success. On HMRC’s interpretation, therefore, s 1138(1)(c) expenditure would never be anything but subsidised or “met”, save for as regards loss-making companies, and the “meticulously drafted code…and large number of carefully delineated conditions” governing the availability of R&D relief (see Gripple at [12]) would largely be rendered unworkable. (b) HMRC’s view that R&D expenditure is not subsidised or “met” where the expenditure is only subsequently exploited for a commercial gain on a separate project is an unjustified gloss. It raises a number of questions, in particular, as regards how uncertain the scope for commercial gain needs to be when the expenditure is incurred and how this uncertainty is to be measured. As recognised in guidance issued by the Department for Business, Innovation and Skills the undertaking of research and development is inherently risky (see paras 4 and 12 of the guidance). There is no material distinction between the risk at an earlier stage in a research and development project of realising any revenue stream as a result of the expenditure and the risk at a later stage when, as here, the research and development is exploited by the taxpayer in the course of providing a product to its clients for a fixed price where the actual costs are uncertain. (c) On HMRC’s analysis the question arises as to whether A has “met”
“Treat a non-returnable grant of money given by way of gift, that is, not in return for anything, as a contribution if there is a clear connection between the receipt of the grant and the incurring of the expenditure. The grant should be specifically related to the capital expenditure on the provision of capital assets.” (Emphasis added.)
“It is unnecessary for me to cite any further provisions of Sch 20. 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. It also needs to be remembered, in this context, that the relief is a generous one, which grants a deduction for notional expenditure which has not actually been incurred. Even if the relief is not available, there will be nothing to prevent the company from deducting its actual R&D expenditure in full in the computation of its trading profits, provided only that the normal ‘wholly and exclusively’ test is satisfied.”
“only if the Tribunal considers that the case – (a) will require lengthy or complex evidence or a lengthy hearing; (b) involves a complex or important principle or issue; or (c) involves a large financial sum.”
“The Tribunal will assess whether, having regard to the nature of a particular case, any one or more of these criteria [in rule 23(4)] are satisfied. In making this assessment the Tribunal will take into account all the circumstances, including the implications of the costs-shifting regime (subject to the right of the taxpayer to opt out) and the fact that cases allocated to the Complex category are eligible, subject to various consents, to be transferred to the Upper Tribunal. If on such an assessment the Tribunal considers that a case meets the stated criteria, it will, in the absence of special factors, allocate the case to the Complex category.”
“it must be a discretion of limited scope. The general rule should, we consider, be that a case capable of being allocated as Complex ought to be so allocated. Any discretion to allocate other than in accordance with that general rule should be exercisable only in the light of special factors.” (Emphasis added.)
“but it [the Upper Tribunal] nevertheless appears, in [30], to have decided that if a case can be allocated as Complex - by which I take it to have meant that it passes through one or other of the gateways - it should be so allocated unless there are “special factors” dictating otherwise. In other words, if this proposition can be taken at its apparent face value, there is no additional criterion, and the burden must be on a party resisting allocation as Complex of a case which has passed through a gateway to demonstrate the “special factors”.”
“....as I have explained, passage of an appeal through one of the gateways is what gives rise to the discretion to allocate an appeal to the Complex category: rule 23 provides that the tribunal may do so only if one of the gateways is passed through, not that it must do so. I mentioned, at para 12 above, the apparent indication by the Upper Tribunal that, absent “special factors”, an appeal which passed through a gateway should be so allocated. I do not, however, think that is what the Upper Tribunal intended, at least if “special factors” is taken to imply some exceptional circumstance. It is not consistent with the manner in which rule 23(4) is drafted, as I explained it at para 6 above, and it is inconsistent with what the Upper Tribunal said in Capital Air Services, at [10].”