The Research and Development (R&D) tax relief system was established to foster innovation and stimulate economic growth, by providing qualifying UK companies with corporation tax relief for qualifying R&D expenditure. Broadly speaking, R&D expenditure is expenditure incurred as part of a specific project to make an advance in science or technology.
Historically, HMRC's approach to R&D claims was one of minimal scrutiny, creating a perception that these claims were low risk and high reward. This led to a surge in claims and the emergence of numerous claim companies designing themselves as self-titled "expert advisers".
However, HMRC is now cracking down on these "advisers" that typically consist of large sales teams that operate by cold calling businesses to encourage R&D claims where the grounds for any valid claim are entirely unknown. This has resulted in a more stringent "volume compliance" approach to R&D claims by HMRC. We previously highlighted this in our article in April written in collaboration with Johnston Carmichael.
DWF successfully assisted James Mackie Wholesale Ltd against claims brought by ZLX Ltd, a self-titled R&D relief "expert".
ZLX Ltd (ZLX) v James Mackie Wholesale Ltd (James Mackie)
DWF successfully defended James Mackie against breach of contract claims brought by ZLX in Glasgow Sheriff Court. James Mackie is a fruit and vegetable wholesaler and had installed a new refrigeration unit at its premises. ZLX approached a director of James Mackie asserting that the company qualified for R&D relief on the installation. The director was sceptical of making any claim given that this work did not seem innovative in any way.
Despite his reservations, ZLX induced the director to contract by advising that the work in submitting the R&D claim would be on a "no recovery, no fee" basis. James Mackie received and returned ZLX's "client pack", which included a client authorisation form, a HMRC form, and project letter. Notably, the pack omitted ZLX's "general terms and conditions".
The director sought professional advice from a chartered accountant, who confirmed that James Mackie would fail to qualify for R&D relief on the installation of the refrigeration units. The accountant also advised that submitting an R&D claim would be substantially prejudicial, requiring James Mackie to repay HMRC any wrongfully-obtained R&D relief, along with statutory penalties and interest and any success fee charged by ZLX that would be difficult to recover. James Mackie then ceased engagement with ZLX.
Thereafter, James Mackie received a "polite notice" from ZLX alongside their terms and conditions. The director of James Mackie indicated that he no longer wished to pursue an R&D relief claim. ZLX notified James Mackie that the contract was terminated due to a "potential breach of contract" because James Mackie had failed to provide 12 months' termination notice required under the "general terms and conditions". ZLX therefore sought a "cancellation fee" of £8,000 plus VAT.
The Sheriff determined that there was no reasonable basis for ZLX to advise James Mackie to pursue a R&D relief claim for the installation of refrigeration units. The Sheriff noted that, given the unusual and onerous nature of ZLX's "general terms and conditions", ZLX should have taken adequate steps to fairly and reasonably bring these to James Mackie's attention. The Sheriff found that ZLX's failure to properly intimate their terms and conditions resulted in those conditions not being incorporated into the agreement and James Mackie should not have to pay the cancellation fee.
In any event, the Sheriff ruled that James Mackie was induced to enter into any contract based on the misrepresentation made by ZLX and the "cancellation fee" amounted to a penalty clause in Scotland that was exorbitant and unenforceable.
How can we help?
Businesses have a legal duty to submit complete and correct tax returns, which includes submitting complete, correct and properly founded R&D relief claims. The case of ZLX v James Mackie serves as a stark warning of the potential pitfalls businesses may face when navigating the complexities of R&D relief claims.
You could put your business at risk if you instruct the wrong advisers. Engaging with accredited and qualified tax professionals, who understand the parameters of tax legislation, regularly communicate with and understand working with HMRC is imperative to ensure you fulfil your tax obligations and submit complete and correct tax returns.
If you require assistance with any aspect of R&D tax relief or assistance with dealing with HMRC, please do not hesitate to contact Caroline Colliston, Zita Dempsey or any of the DWF tax team, or your usual DWF contact.
