Background: Covid-19, care homes and R&D tax relief
Tanglewood operates residential care homes and, during the Covid-19 pandemic, developed an extensive programme of infection-control measures designed to protect vulnerable residents. The company subsequently submitted an R&D claim for just over £380,000 of qualifying expenditure relating to a project entitled “Managing outbreak & effects of a Global Pandemic in a residential care home (Covid-19)”.
Taken at face value, this case seems clear cut, instances of care homes claiming R&D credits have been touted as examples of the fraud and abuse that has plagued the schemes in recent years. However, the First Tier Tribunal (FTT) found the care home’s management to be credible and cooperative witnesses, certainly no one can claim the work they were engaged in did not have a societal benefit to it, nor that the business was not seeking to overcome unprecedented challenges. However, ultimately the company’s claim was rejected. The FTT’s recent decision in Tanglewood Care Services Limited v HMRC provides important guidance for companies seeking to claim R&D tax relief where innovation arises from operational necessity rather than traditional scientific or technological development.
HMRC contested the claim on the basis that Tanglewood was simply applying existing scientific knowledge regarding infection control and virus transmission to its own operational circumstances and was not undertaking activities that sought an advance in science or technology. The case therefore raised a question that extends far beyond the care sector – when does work to respond to a complex business challenge become qualifying R&D for tax purposes?
The Tribunal’s Decision
The FTT ultimately dismissed the appeal and upheld HMRC’s denial of the claim. Significantly, the FTT accepted that Tanglewood had undertaken a genuine project involving information gathering, monitoring, review and refinement of procedures.
The FTT also confirmed that R&D is not limited to the creation of entirely new scientific knowledge. A qualifying advance may relate to improving capability as well as knowledge, and system uncertainty can potentially qualify where uncertainty exists in how known components or processes should be integrated.
However, the claim failed because the project was directed at solving Tanglewood’s own operational challenges rather than advancing overall scientific knowledge or capability. The uncertainties being addressed were identified as predominantly managerial and operational matters, as opposed to scientific ones. An important factor in this decision was that the company did not employ any competent professionals in the relevant fields of science (epidemiology, infection control etc), therefore the appellant could not provide HMRC (and by extension the Tribunal) with a baseline of knowledge in these fields, nor articulate the advancements and uncertainties necessary to claim the relief.
Commentary: A surprisingly balanced decision
The decision is notable because the Tribunal rejected an overly narrow interpretation of the R&D rules by HMRC. It confirmed that projects involving known components are not automatically excluded and that system uncertainty remains a valid route to relief in principle.
At the same time, the judgment reinforces a critical boundary. Solving business challenges is not enough. The statutory test requires evidence that a project sought to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. In principle, claimants should be comfortable that the knowledge they are developing has utility outside of just their business and that there is an argument that peer experts at other businesses could use said knowledge to improve their own products, processes and services.
The Tribunal also highlighted the importance of evidence from the competent professional. Although Tanglewood’s witnesses had deep operational expertise, they could not provide authoritative evidence regarding the relevant scientific or technological field.
Key takeaways
Founders and finance directors should recognise that solving a difficult business problem is not necessarily R&D. Businesses must be prepared to clearly demonstrate that the uncertainties they’ve attempted to resolve relate to scientific or technological concepts rather than operational or commercial effectiveness and have the suitably skilled personnel to make these arguments.
Companies should identify the relevant competent professionals early, document the baseline state of knowledge, record uncertainties and retain evidence explaining how those uncertainties were addressed as work is carried out.
Speak to HaysMac
If you are reviewing an R&D claim, responding to an HMRC enquiry or assessing whether a project meets the threshold for relief, the HaysMac R&D team can help you build a robust, evidence-led position. Our R&D tax specialists work with businesses to identify qualifying activity, test the strength of technical uncertainties and prepare claims that stand up to scrutiny. To discuss your position, contact Jack Williams at Jwilliams@haysmac.com
