Judgment summary
Tanglewood Care Services Limited appealed against a Closure Notice issued by HMRC under paragraph 32(1A) Schedule 18 Finance Act 1998 for the accounting period ended 31 January 2021 (1). The Closure Notice removed the Appellant's claim for enhanced research and development expenditure of £880,286 relating to a single project titled 'Managing outbreak & effects of a Global Pandemic in a residential care home (Covid-19)' and amended its corporation tax liability accordingly (1, 6).
The principal issue was whether the activities relied upon constituted research and development for the purposes of Part 13 CTA 2009 and the BEIS Guidelines on the Meaning of Research and Development for Tax Purposes (2, 22).
The Tribunal, comprising Tribunal Judge Stapenhurst and Mr Julian Sims, heard evidence from three witnesses for the Appellant, all experienced in care home management but none with expertise in virology, epidemiology or infection science (45-54, 111-112). The Tribunal accepted the Appellant had undertaken a 'project' within paragraph 19 of the Guidelines but concluded it had not established an advance in overall knowledge or capability in a field of science or technology, nor that its activities were directed at resolving scientific or technological uncertainty (87, 100, 109). The appeal was dismissed (121).
Background
The Appellant was incorporated on 2 June 2015 and operates residential nursing care facilities (4). It filed its corporation tax return for the accounting period ended 31 January 2021 on 28 February 2022, without making an R&D claim (5). On 9 September 2022 it submitted an amended return claiming enhanced R&D expenditure of £880,286 in respect of a single project concerning management of Covid-19 in its care homes (6).
The Appellant operated seven residential care homes during the relevant period, with predominantly elderly and vulnerable residents (75). It implemented a wide range of measures including PPE requirements, visitor restrictions, testing arrangements, isolation procedures, cohorting of residents, staff segregation, enhanced cleaning protocols and revised admissions procedures, which were continually reviewed and adapted (77-78). No formal written project plan was prepared, and decisions were made through ongoing management discussions (79).
Core dispute
The parties agreed the principal issue was whether the activities relied upon by the Appellant constituted research and development within the meaning of Part 13 CTA 2009 and the BEIS Guidelines, in particular whether Condition D under section 1044 CTA 2009 (qualifying Chapter 2 expenditure) was met (2, 14-17).
The Appellant contended that its project involved developing and integrating a system of multiple infection-control measures to address system uncertainty within the meaning of paragraphs 29 and 30 of the Guidelines, and that it was not required to demonstrate an advance in scientific understanding of Covid-19 itself, only an advance in capability (57-59). It relied on paragraph 9(c) of the Guidelines regarding appreciable improvement through scientific or technological changes (62).
HMRC contended that the Appellant was applying existing scientific knowledge regarding infection control to its own operational circumstances, that there was no qualifying project, no relevant field of science or technology established, no advance in overall knowledge or capability, and no evidence from a competent professional capable of assisting the Tribunal (10, 67-74).
Court findings
The Tribunal found that the Appellant's activities exhibited a significant degree of organisation and structure, including regular management meetings, data collection and continual modification of procedures, and accepted that this constituted a 'project' within paragraph 19 of the Guidelines, distinguishing the case from Hadee Engineering Co Ltd v HMRC [2020] UKFTT 497 (TC) (86-87).
However, the Tribunal held that a product, process or service does not qualify merely because it exhibits improved functionality, citing Gripple Ltd v HMRC [2010] EWHC 1609 (Ch) at [12] (93). The Tribunal accepted that paragraph 6 of the Guidelines does not require an advance in underlying scientific knowledge in every case, and that the Guidelines can extend to system uncertainty arising from interaction of known measures (94, 104, 118).
Nevertheless, the Tribunal was not satisfied that the project sought an advance in overall knowledge or capability in a field of science or technology, finding instead that the Appellant's objective was the practical management of an unprecedented operational challenge within its own operations (99-100). The Tribunal also found that most of the alleged uncertainties were operational and managerial in character rather than scientific or technological, referencing paragraph 15 of the Guidelines on social sciences not being 'science' (106-108).
The Tribunal further noted the absence of evidence from a competent professional in a relevant scientific or technological field, referring to Flame Tree Publishing Ltd v HMRC [2024] UKFTT 349 (TC) and AHK Recruitment Ltd v HMRC [2020] UKFTT 232 (TC), which left it without sufficient evidence as to the relevant baseline knowledge or whether uncertainties were readily deducible (112-114).
Outcome
The Tribunal concluded that the activities relied upon by the Appellant did not constitute research and development for the purposes of Part 13 CTA 2009 (120). The appeal was dismissed (121).
Major issues / areas of contention
- Whether the Appellant's Covid-19 infection-control activities constituted a 'project' within paragraph 19 of the BEIS Guidelines
- Whether the project sought an advance in overall knowledge or capability in a field of science or technology under paragraphs 3 and 6 of the Guidelines
- Whether the relationship between paragraphs 6 and 9 of the Guidelines allows an 'appreciable improvement' under paragraph 9(c) to satisfy the R&D test without a separate advance in overall knowledge or capability
- Whether the alleged uncertainties amounted to scientific or technological uncertainty, including 'system uncertainty' under paragraphs 13, 14, 29 and 30 of the Guidelines
- Whether the Appellant had produced sufficient evidence from a 'competent professional' in a relevant scientific or technological field
- Whether Condition D under section 1044 CTA 2009 (qualifying Chapter 2 expenditure) was satisfied