Tax credit error cost £150K

A company was paid more than £150,000 in research & development tax
credits erroneously, a High Court judge has concluded in a ruling that could
prompt a widespread review of the whole R&D tax credit system.

Mr Justice Evans-Lombe ruled last week that a small software manufacturer, BE
Studios, had received £151,862 in R&D tax credits, despite there being ‘no
evidence upon which it is possible to base a claim that BE Studios was engaged
in qualifying R&D work’.

Sources close to the case believe the ruling reveals systemic weaknesses in
the operation of Gordon Brown’s R&D tax credit scheme – a measure viewed as
a flagship tax policy.

BE Studios had sued its tax advisers, Smith & Williamson, for not
advising that it could claim for R&D credits, a claim that was dismissed on
all counts.

The R&D tax credit system, which cost the government £450m last year, has
attracted widespread criticism, on the grounds that credits have been

Companies seeking to apply for R&D tax credits have to prove they are
producing something technologically new, but Revenue & Customs does not
employ scientifically trained inspectors to oversee the scheme.

BE Studios’ case is thought to be the first disputed claim to come to public

David Cobb, an R&D relief specialist at Deloitte, said that in this case,
no scientific expertise was required.

BE Studios’ claim for tax relief was prepared, the judge said, without
reference to documents and ‘without properly consulting amongst others as to the
nature of the work which BE was undertaking’.

But Cobb said: ‘The case highlights the confusion over what is acceptable to
the Revenue.’

A spokesman for Revenue & Customs said: ‘It is the duty of the company
making the claim to assess its entitlement to R&D tax credits, and help is
available to ensure this is done correctly. HMRC may enquire into returns, but
does not do so in all cases.’

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