The First-tier Tribunal’s (FTT) decision in RDM Wines Limited (“RDM”) vs HMRC continues a theme from recent R&D tribunal cases: businesses should treat record keeping and claim governance as an integral part of the R&D process, rather than attempting to reconstruct the evidence when a claim is subsequently challenged.
It also provides another reminder that the development of an innovative product does not necessarily represent R&D for tax purposes.
For founders and finance directors, the decision highlights two important principles: companies need to distinguish genuine scientific or technological advancement from commercial innovation, and they need to retain sufficient evidence to demonstrate what actually happened during the project.
Background
RDM is an importer and distributor of wines, who claimed R&D tax relief in relation to their release of a new wine in a can product. RDM’s stated aim was to develop a wine suitable for sale at venues where glass could not be used, which involved overcoming challenges associated with oxidation, shelf life and preserving the quality and taste of the wine.
RDM argued that, during its work with a South African winemaker, it had undertaken an iterative development process to overcome these challenges. HMRC rejected the claim, with a total of £43,387 in dispute, leading RDM to appeal to the First-tier Tribunal.
Innovation does not (always) equal advancement
The first significant takeaway concerns a recurring issue within R&D claims, the distinction between developing something innovative and seeking an advance in a field of science or technology.
RDM maintained that the product and approach it developed were unique. However, uniqueness or novelty is not the relevant test for R&D tax relief. A company must demonstrate attempts to realise an advance in overall scientific or technological knowledge or a capability that was not readily deducible by a suitably experienced expert in the relevant field.
The Tribunal considered industry literature that both parties accepted as representing the existing state of knowledge within the winemaking industry. That material already discussed issues including oxidation, dissolved oxygen, can linings, corrosion, shelf life and the use of inert gases when canning wine. Against that baseline, the Tribunal was not satisfied that RDM had demonstrated an advance in overall scientific or technological knowledge or capability.
This is an important point for companies assessing potential R&D claims. A product might be new to the business, new to its customers or potentially even unique in the market, but that does not necessarily mean its development required an advance in science or technology.
Instead of asking “Have we created something new?”, businesses should be asking: “What technical problem was the project trying to solve that could not be solved using public knowledge, industry know-how or established best practices?”
Contemporaneous evidence matters
The second, and again frequently arising, aspect of the judgment is the emphasis placed on evidence.
RDM described an extended iterative development programme involving different wines, can dimensions, lining materials and gases. However, the Tribunal found that the contemporaneous documentation did not support the timeline or extent of testing described.
The company’s case therefore relied heavily on the memories of the parties involved several years after the work had allegedly taken place.
Significantly, a letter from RDM’s winemaking partner dated just days before the Tribunal hearing described testing involving alternative can linings, different gases and can sizes. However, the Tribunal placed little weight on this evidence. The letter had been prepared more than three years after the relevant events and its description of the project was not supported by records from the time. A more skeptical eye might have also considered that the testing being carried out would have been routine for an established winery, however that was not a relevant factor in this case.
Unlike several recent cases, the issue was not necessarily the credibility of the individuals involved. Though RDM’s sole witness (their head wine taster) acknowledged that he did not have the relevant expertise in winemaking or canning processes, instead the Company maintained that this sat with their development partner. Rather, the case demonstrates the inherent difficulty of attempting to reconstruct the precise nature and sequence of technical development work several years after the event.
The Tribunal gave examples of the sorts of evidence it might reasonably have expected the project to generate, including instructions to perform testing, meeting notes, emails or messages discussing results, feedback between the parties, invoices for development work or contracts evidencing the relationship with the external party. The failure of RDM to produce these records meant that they were unable to demonstrate that the systematic programme of development described in its appeal had actually taken place.
Key takeaways
The RDM decision reinforces recurring themes emerging from R&D tribunal cases that give useful pointers to prospective future claimants:
- Contemporaneous evidence matters more than a retrospective narrative
A well-written technical report can explain the claim, but it cannot replace evidence showing what was actually happening during the R&D project. Companies should therefore retain the records created as technical work progresses. - This should not require a new layer of R&D bureaucracy
The objective is not to add an administrative burden to slow down your engineers and developers. Evidence may already exist in project-management tools, technical specifications, test results, design reviews, issue logs, emails, meeting notes and similar records. The key is making sure relevant material is identified and retained. - The competent professionals need to be involved
Finance teams should not be expected to determine whether a challenge represents technological uncertainty. That assessment needs meaningful input from people with appropriate technical expertise within the field. - R&D claims are increasingly a governance issue
For a finance director, the important question is therefore not “Can I personally explain the technological uncertainty?” It is “Do we have the right people making that assessment, and do we have appropriate evidence supporting what they have concluded?”
Should you have queries regarding the consequences of the case above, and what it could mean for you and your business, then the HaysMac team is on hand to support. Reach out to Jack Williams, Director on jwilliams@haysmac.com, to arrange a time for discussion.
