Corporation tax

FTT allows R&D claim by software development company

The First-tier Tribunal (FTT) has handed down a decision, in favour of the taxpayer, in the research and development (R&D) case of Get Onbord Limited. The appeal concerns a claim for an R&D tax credit under s1054, Corporation Tax Act 2009, in relation to a project undertaken to develop a novel, automated artificial intelligence (AI) analysis process for ‘know-your-client’ verification and risk profiling. 

HMRC rejected the claim on the basis that the project “did not advance overall knowledge or capability” per the relevant government guidelines and therefore the associated expenditure did not qualify for relief. The decision examines the application of the guidelines to software development and coding activities, and, among other matters, rejects a possible view that a software project would need to be completely novel, and avoid the use of existing open-source code components, to meet the definition of R&D. 

The decision also examines the meaning of the term ‘competent professional’, finding in this case that a key individual met the definition based on his relevant experience and up-to-date knowledge, despite not having relevant academic qualifications. 

Based on the evidence provided by witnesses for the taxpayer, including having the credible competent professional available to cross-examine, the Tribunal was satisfied that on the balance of probabilities the required conditions were satisfied and had been sufficiently proved, and the R&D credit claim was allowed.

Get Onbord Limited (in liquidation) v HMRC [2024] UKFTT 617 (TC)

From the Business Tax Briefing dated 12 July 2024, published by Deloitte

VAT

Collagen drink product is not food – FTT

Bottled Science Ltd sold Skinade, marketed as “a uniquely formulated drink using advanced technology and high-quality ingredients for your skin”. Bottled Science made a claim for overpaid output tax of £1,250,840, on the basis that Skinade should be zero-rated as food.

The First-tier Tribunal (FTT) has ruled that, for VAT purposes, Skinade was not food. Factors reviewed by the FTT but considered not to be conclusive included whether Skinade was a beauty product, its name, its nutritional value, its palatability and taste, and the application of food safety regulations. 

The factor weighing most heavily on the FTT was the way in which Skinade was packaged and marketed. The packaging of the product was “quite clinical”, and “its overall presentation and route to market are very different from what one would expect of a foodstuff”. The FTT considered that “a well-informed, broad-minded VAT payer” would recognise that although Skinade had some nutritional value, it was not consumed to keep the body alive or able to function and develop, and it was distributed and marketed differently from what would be expected for food. 

In conclusion, while acknowledging that the issue was not easy to resolve, the FTT considered that Skinade was not food, and did not qualify for zero-rating. 

Bottled Science Limited v HMRC [2024] UKFTT 592

From the Weekly VAT News dated 15 July 2024, published by Deloitte

No relitigation of input tax claim 

In 2006, Telent Technology Services Ltd placed funds in escrow for the future funding of its occupational pension scheme and recovered input tax on fees paid for investment advice. In 2014, HMRC issued an assessment to recover that input tax for the periods October 2010 to May 2014. Telent appealed the assessment (the Assessment Appeal), but subsequently withdrew that appeal. Six months later, having changed professional advisers, Telent renewed its argument for input tax recovery, and made a claim for the periods August 2012 to August 2016. 

HMRC ultimately conceded that Telent was entitled to input tax recovery in principle, but argued that the new claim could not overlap the period dealt with in the Assessment Appeal. Telent appealed this decision (the Claim Appeal). The Upper Tribunal (UT) has upheld the First-tier Tribunal’s (FTT’s) decision that Telent was prevented from relitigating the overlap period. 

The basis of Telent’s first ground of appeal was that HMRC had acquiesced in Telent bringing the Claim Appeal or were otherwise estopped from raising the procedural issue of the overlap period. The FTT had found that there had been no detriment to Telent from HMRC raising the issue of the overlap period “late in the day”. Accordingly, the UT held that HMRC were not barred from raising this procedural issue. 

Telent’s other grounds of appeal related to whether Telent was prevented from relitigating the overlap period. Under s85, Value Added Tax Act 1994, on withdrawal of the Assessment Appeal, the FTT was deemed to have determined that the input tax in question was not allowable and this included the input tax for the overlap period. Accordingly, Telent was not able to relitigate the issue, and the UT dismissed telent’s appeal. 

Telent Technology Services Limited v HMRC [2024] UKUT 183

From the Weekly VAT News dated 1 July 2024, published by Deloitte

VAT and serviced accommodation

The reduced value rule means that hotels and similar establishments need only charge VAT on part of the amounts invoiced to long-term guests (usually 20%, reflecting the services enjoyed by the guests but not the accommodation itself). In the case of BLS1 Ltd, the Isle of Man (IOM) High Court has ruled that the reduced value rule should apply to the provision of serviced accommodation in studio apartments at The Quarters in Swiss Cottage, London. 

BLS1 (established in the Isle of Man) arranged for the studios to be cleaned and for towels and linen to be changed weekly. Each studio had a basic kitchenette, a desk and a sofa, as well as a bed and bathroom. The High Court considered that the question of whether The Quarters was a “similar establishment” to a hotel did not depend (as the IOM VAT and Duties Tribunal had thought) on whether BLS1’s supplies would otherwise be exempt from VAT. The question of whether BLS1 was granting a licence to occupy land (a proposition rejected by the Tribunal) was not therefore relevant. The Tribunal should have limited itself to the straightforward question of whether The Quarters was a similar establishment to a hotel, and the associated statutory test of whether it was held out as being suitable for use by visitors or travellers. 

The Tribunal’s findings of fact showed that The Quarters was similar to a hotel, and BLS1’s appeal was allowed. It had correctly applied the reduced value rule to services provided to long-term occupants. 

BSL1 Ltd v IOM Treasury (Customs and Excise Division) 2DS 2023/23

From the Weekly VAT News dated 24 June 2024, published by Deloitte

VAT and administrators of insolvency proceedings

C SPRL provided services to insolvent Romanian companies, including the appointment of insolvency practitioners. Payments by the companies for C’s services were not always punctual, and it therefore sought to defer the time when it should account for the associated VAT. C has not been successful. 

In the Court of Justice of the European Union’s (CJEU’s) judgement, C’s services gave rise to successive statements of account or successive payments, and should therefore be treated as supplied at the end of the period to which they related. C could not take advantage of the alternative rules for continuous supplies (which would potentially have allowed output tax to be deferred to the end of the year). Nor could the CJEU identify any reason why C should be allowed to defer output tax until it received payment (bad debt relief should be available for non-payment). 

On a separate issue, the CJEU also considered input tax recovery on services provided by a law firm to C, which used the firm’s name to endorse proposals to creditors for insolvency appointments. In the CJEU’s judgement, there was no need for C to demonstrate that the endorsement increased its turnover. Input tax recovery is not dependent on profitability. Instead, a direct and immediate link was probably established simply by the fact that C displayed the law firm’s name on its proposals. 

Finally, on a point of tax administration, the CJEU ruled that the decision of the Romanian tax authorities had to be annulled if C had not been given an opportunity to present its case on certain issues, and if the outcome might have been different had it been allowed to do so. 

Case C-696/22, 1 C (Court-appointed administrators and liquidators).

From the Weekly VAT News dated 24 June 2024, published by Deloitte