Tills Plus Limited V The Commissioners for HMRC

In a recent decision, a First-tier Tribunal denied R&D Tax Credit claims totalling £665,000, based on two key issues. The case, involving Till Plus Ltd, questioned whether the claimant made the correct payments to its subcontractor and whether the work qualified as R&D. The Tribunal ruled that while the payments were accurate, the activities did not meet the R&D criteria.

In my opinion this was quite a chaotic case but it does highlight the importance of having a robust competent professionals who can confidently talk about the technical elements of the R&D project. In this case, there were inconsistent descriptions of R&D activity, a clear lack of technological advancement and overall insufficient supporting evidence.

This decision underscores the critical importance of clear, consistent, and well-documented evidence when claiming R&D tax credits and is a perfect example of why you should use a trusted R&D Tax Consultancy, like TBAT Innovation.

ABOUT THE COMPANY  

Tills Plus Limited (TPL) is a UK company established in 2015 by Mr Kosari who is the sole shareholder and director of the company. TPL develops technology for the hospitality industry and is involved in particular in electronic point of sale (“EPOS”) systems.  

In around 2017, Tills Plus wished to develop a new product or suite of products. The funding for this was to come from Mr Kosari’s father-in-law, Mr Fatoorehchi, a resident of Iran. As a result of international sanctions, it was challenging to move money out of Iran and so TPL looked for a partner in Iran to carry out the necessary development work. A “Software Development Agreement” was entered into between TPL and iWond on 10 May 2017. The agreed service was to: “Carry out research and development of a virtual hospitality manager using Artificial Intelligence and Big Data by developing niche data capture platforms.” 

A key issue was what specifically was iWond asked to do due to conflicting documentary evidence (mainly relating to the nature of the R&D project). Additionally, the agreement between iWond and TPL did not set out any specific fees for the work to be done. It was simply set up so that TPL would be invoiced every three months. Invoices were issued and addressed to TPL However, the agreement between TPL, Mr Kosari and his father-in-law, Mr Fatoorehchi was that Mr Fatoorehchi would make a loan to Mr Kosari who would in turn make a loan (recorded on a director’s loan account) to TPL. However, as a result of the difficulties in moving money in and out of Iran, it was agreed that iWond’s invoices would be paid directly by Mr Fatoorehchi from his bank account in Iran.  

The loans from Mr Fatoorehchi to Mr Kosari and from Mr Kosari to TPL were both interest-free and repayable on demand. None of this was committed to writing at the time although, as a result of HMRC’s enquiries, loan agreements were drawn up and signed by the parties recording the terms of the loans. At that time, the total amount of the loans totalled £2,444,000. 

• For the APE 2018, TPL claimed £1.5 million worth of R&D expenditure (£390,000 TSE) which was paid out by HMRC but its claim for just over £1 million worth of R&D expenditure for APE 2019 (£275,000) was not paid by HMRC. 

• HMRC had two issues with the claim. Firstly, the ‘R&D issue’ in that it didn’t think the project constituted R&D for tax purposes. Secondly, the ‘payment issue’ in that it believed TPL had not made a payment to its sub-contractor in respect of what was said to be the R&D.

• TPL said that HMRC should not be permitted to raise or rely on the R&D issue as justification for its decision to deal with the ‘payment issue’. 

• The tribunal held that HMRC should be allowed to rely on the R&D issue. 

• A letter from HMRC, raised concerns about whether the expenditure related to the R&D and whether the payment condition had been met. In the letter, it stated, “as a result of the enquiry into the R&D claims for APEs 2018 and 2019 tax credit has been reduced to zero”. 

• Therefore, the subject matter of the appeal was the reduction of the R&D claim to zero. The tribunal added that there is “no reason why HMRC should not be able to rely on the R&D issue in supporting that conclusion”. 

• The claimant challenged this stating that HMRC said the payment condition had not been satisfied and that they did not “require any further information about the R&D activity”. Therefore, TPL proceeded on the basis “that the payment issue was the only point which it had to meet and that it will be put at a severe disadvantage if it is now required to deal with the R&D issue as well given the scope of the evidence which it has so far provided”. 

• The tribunal held that TPL had been aware since October 2022 that HMRC was relying on the R&D point. They, therefore had every opportunity to address the point in their evidence or to object to HMRC’s reliance on this issue. In addition, HMRC went out of its way to explain what TPL would need to prove and what evidence would be required to succeed on the R&D issue. 

• The hearing therefore proceeded on the basis that it would deal both with the payment issue and the R&D issue.

The “payment issue”

• The legal framework states that the expenditure which qualifies for relief is limited by s 1053(1)(a) to “expenditure which is incurred by [the company] in making the qualifying element of a sub-contractor payment”. 

• HMRC argued that this piece of legislation should be interpreted literally and strictly so that the requirement for a payment to be made by the company to a sub-contractor can only be satisfied if there is a physical payment from the company’s bank account to the sub-contractor. 

• TPL countered this, pointing out that payment by credit card did not satisfy the requirements of the legislation simply on the basis that there was no physical payment by the company to the sub-contractor. 

• The undisputed facts were that iWond’s invoices were addressed to TPL and were therefore an obligation of TPL. The invoices were physically paid by Mr Fatoorehchi but this was treated by agreement as a loan from Mr Fatoorehchi to Mr Kosari and then a loan by Mr Kosari to TPL. The result of this was that TPL’s obligation to iWond represented by the invoice was discharged and was replaced by an obligation for TPL to repay the loan to Mr Kosari. The discharge of the invoice was therefore at the cost or expense of TPL. 

• HMRC objected to this on the basis that the loan from Mr Fatoorehchi to Mr Kosari and from Mr Kosari to TPL was not a commercial loan as it had no interest and no fixed date for repayment. 

The “R&D issue”

• HMRC accepted that TPL’s R&D involved the use of technology but cited para 8 BEIS Guidelines which states “work which uses science or technology but which does not advance scientific or technological capability as a whole is not an advance in science or technology”.  

• Para. 10 of the guidelines, however, makes it clear that it is enough to seek an advance and that the project does not have to be successful. The burden of proof, therefore, fell on TPL to show that the work which iWond was asked to do amounted to a project which sought to achieve a technological advance through the resolution of technological uncertainty. 

• The claimant said the technological advance was to create “one unified platform that can provide SMEs with the tools and infrastructure they need to adapt to the technology they need in order to encourage and support growth in their businesses”. 

• He explained the technological uncertainty was “The challenge is and was to be able to align all of the solutions required to run an efficient operation into one product with one dashboard and log in credentials no matter if you are setting up and managing your EPOS, pre-ordering portal or your time and attendance. In other words, developing bespoke software that isn’t otherwise available, improve data encryption and security on the components that were available, devising innovative methods of capturing, manipulating, protecting and transmitting data, integrating software components into a single platform and developing algorithms to eventually act as a virtual manager for the merchant using the data captured and processed by each and every component of the solution. The capture of all this data will enable us to complete the development of an intelligent virtual operational manager to manage and assist in the running of the business using the data captured using the above methods.”

• The main problem was that a further document was sent to HMRC describing a completely different R&D project. The document followed the template of HMRC’s previous request and in the document, the ‘competent professional’ was identified as Mohammed Safari with his credentials listed. Although the names were slightly different, the list of credentials mirrored the same qualifications as Dr Zade (the competent professional who prepared the original tax report). 

• Then, again, another report from Dr Zade (who was working at iWond) was submitted in the format of HMRCs template. The report described work that aimed to develop a tool to analyse customer reviews in the hospitality sector. 

• “The aim is to find upside and downside of each hotel, restaurant and local café based on customers’ comments … we want to develop a multi-modal deep learning method that is able to process text, image, video and voice to extract sentiment analysis, rumour, racism and sexism, cyberbullying, fake information and toxic comments.” 

• HMRC rightly so, argued that there were clear inconsistencies between what HMRC was told in February-May 2021 and the subsequent report from December 2021 and that, as a result, it was impossible to be satisfied that the requirements for the work done by iWond constituted R&D. 

• When asked to explain the inconsistency between the explanation provided on 22 February 2021 and the December 2021 report during cross-examination, Mr Kosari emphasised the fact that he was not an expert in IT or artificial intelligence and instead was more of a businessman. This obviously impacted his evidence given as he inevitably could not go into the necessary level of technological detail. Instead, Mr Kosari relied heavily on the report prepared for TPL by Dr Zade in December 2021. When compared to TPL’s earlier explanations given to HMRC as to what the R&D consisted of, the attempts to explain the obvious inconsistencies between the documents were deemed unconvincing. 

• Despite all of this, the tribunal held that Dr Zade was a competent professional working in the relevant field for the purposes of the Guidelines. They also found that the 2021 report did constitute R&D within the guidelines.  However, based on the other evidence available to the tribunal, they did not consider the December 2021 report sufficient-enough evidence to be relied on as an accurate description of the work which iWond was asked to undertake.  

• In his evidence, Mr Kosari explained that documentary evidence of the interactions between Tills Plus and iWond, including changes and developments in the work was available. However, this was not evidence that TPL had chosen to provide to the Tribunal. 

• Taking account of all of the evidence (or lack of) it was held that the December 2021 report did not reflect the work which iWond was engaged to carry out and that this was instead found in the explanations given to HMRC between February 2021 and May 2021. The December 2021 report therefore did not form the basis for a conclusion that the work done qualified as R&D. 

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The above highlights the necessity of thorough and consistent documentation in R&D Tax Credit claims. If you would like to set up a call with our Senior R&D Tax Consultant to discuss your business and how we can help, click here. If you have a general enquiry and would like to speak to the team, please contact us today.