Care home loses £880k tax case as ‘R&D tests not met’
The tribunal ruling in Tanglewood Care Services over six-figure R&D tax relief dispute failed as ‘no valid R&D work completed’, says Hugh Wragg, R&D compliance manager at randd
The decision at the First Tier Tribunal (FTT) in the case of Tanglewood Care Services Limited, the operator of a residential care home, is a classic warning for companies aiming to claim research and development (R&D) tax relief.
HMRC had rejected an R&D tax relief claim by the care home, disallowing the spending of £880,286 on the grounds that no valid R&D work was conducted.
The appellant, Tanglewood believed that attempts to minimise the spread of disease during the pandemic were novel and while the tribunal praised the work conducted by the care home, it concluded that managing operational challenges was not the same as advancing scientific knowledge.
Due to the implementation of external guidance and scientific discoveries only constituting a system uncertainty, the FTT confirmed that no valid R&D work had been completed and many of the vital components for an R&D tax relief claim were absent – including a competent professional in the relevant field of science or technology.
The key points discussed in the tribunal apply more broadly to the sector and should not be ignored.
Tanglewood operated in a sector that is ineligible for R&D and lacked a competent professional, so HMRC’s rejection of the claim was understandable and reasonable. However, other businesses may fall into a similar trap of thinking the work they do is innovative and dismiss the findings of this tribunal by not going beyond the headline.
Businesses must consult the guidance before attempting to compile an R&D tax relief claim. Where confusion may persist around the validity of the work undertaken, using the advanced assurance scheme or engaging with an R&D tax consultant is better than submitting an erroneous claim.
The guidance clearly delineates between routine activities that are ineligible and those that are genuine advances and can be part of a valid claim.
A simple way of telling the difference is by questioning whether the issue extends beyond what is thought to be possible within the current understanding of science and technology – if the work goes beyond that, it is likely to qualify.
Inspiration can strike different businesses as new challenges arise, so even those not traditionally invested in science and technology should not necessarily view the tribunal ruling as a barrier.
While Tanglewood is part of the social science sector and the work is generally ineligible, there are instances where advances occur outside of the traditional sectors.
For example, randd recently worked with a college which was able to innovate in the field of audio-visual technology, and another client that mainly did social science work but developed a novel piece of software and as a result psychologists were able to achieve an advance in data processing.
The commonality between these, and the thing lacking in the Tanglewood case, is a genuine advance in the field of science or technology overseen by a competent professional. Each of these claims either had a competent professional in-house or brought one in for the duration of the project.
The absence of a competent professional was noted by the tribunal as one of the critical flaws in the Tanglewood case. However, many businesses are unclear about who counts as a competent professional.
A competent professional is someone who is an expert due to qualifications, experience or both. While HMRC favours qualifications as evidence, there is no denying that an engineer who has been innovating for decades should be viewed as an expert.
If Tanglewood had brought in an expert virologist to seek a novel way of containing the spread of disease then there is a possibility it could have qualified – though the project would have looked very different.
The tribunal ruling is the latest example of the more compliance-focused HMRC that has been able to root out much of the error and fraud within the R&D space. Enquiries have been the main catalyst for this improvement and have led to the value of R&D claims increasing while the amount submitted declines.
More R&D takes place than people realise, but there is a limit to what can be accepted by HMRC. It is essential to conduct thorough health checks throughout the process and support accountants as well as innovative businesses.
Knowing ahead of time whether something is valid R&D can save time and money, while ensuring all qualifying costs are captured in the R&D tax relief claim.
