Could some old case law prove to be a turning point in R&D tax credit enquiry appeals?
In arguments, disputes and litigation, the burden-of-proof logical fallacy depends on convincing your opponent that they bear the burden of proof when in fact you do. The trick puts your opponent on a back foot that in reality belongs to you. I’ve seen this ruse employed by HMRC’s Solicitors Office and Legal Service (SOLS) on behalf of its client-patron HMRC.
The premise
A claim for R&D tax relief was made and we assisted with the enquiry. HMRC asked for evidence to support the claim. We submitted a patent that had been granted for the advance, along with other supporting documents.
HMRC did not acknowledge the patent and continued to contend the advance was not novel, as though we had not submitted evidence. We disagreed and referred the case to SOLS. The letter we got back is the case in point.
Brief history of proof
Intended to protect against vexatious allegations, the burden of proof in UK civil law lies with the person making a claim and the standard of proof is “on a balance of probabilities”.
In tax law, however, where the burden resides is not always as clear as it should be. When the initial claim for R&D tax relief is made, we can accept that the burden sits with the taxpayer. So far, so fair.
Less fair, but still accepted (since Nicholson v Morris), is that if HMRC makes a finding against the taxpayer, there is an assumption that the Revenue is ipso facto correct and the burden of proving the department got it wrong falls to the taxpayer. I don’t love it. But there it is.
Looking glass
Our recent enquiry, however, takes this one step through the looking glass. HMRC ignores the evidence it solicited and continues with obduracy to dismiss the claim. In its letter, HMRC’s “view of the matter” amounts to the counterclaim that the project fails BEIS/DSIT guidelines because the technology is “not novel”. However, HMRC does not provide its justification for ignoring the patent or any reasoning to show why it believes the advance is not novel in the teeth of compelling evidence to the contrary.
When we took this to SOLS, the Revenue’s vertically integrated solicitor airily replied that the burden of proof is with the taxpayer, not HMRC. It sounds at first hearing as though this argument has legal force, given the precedent in Nicholson and coming as it does from a lawyer, albeit one that is its own client. I mean, it sounds legal-ish.
But it’s not so cut and dried.
Pass the parcel
The taxpayer at this point has already supplied compelling evidence to contradict the Revenue. Were that evidence to be heard, the claim would likely succeed, as a patent by definition cannot be granted to a technology that is not novel. At this point, I would argue that the burden of proof is passed back to HMRC to support its counterclaim. Luckily, we can find precedent for this position in Wood v Holden:
“where the taxpayer has produced evidence which, as matters stand then, appears to show that the assessment is wrong … the evidential basis must [then] pass to the Revenue”.
In the light of this, I venture that SOLS is wrong in law to contend that the burden of proof remains with the taxpayer at this stage. Rather, HMRC must justify ignoring evidence that would otherwise result in tax relief being awarded. I also feel that, being experts in tax law, SOLS knew this – but hoped we didn’t.
Trial by kangaroo
The absurd logical outcome of this fallacy, were we to fall for it, would be to create a kangaroo court where the taxpayer must continue to throw proof into the abyss, without being told what test they had failed and in the full knowledge that any evidence that could exonerate them would be ignored – a dystopian scenario that could play out indefinitely, until the taxpayer runs out of money, moxie or marbles.
What I’d be keen to hear from colleagues is whether the precedent in Wood v Holden could be further used to push back on the core assumption of infallibility in Nicholson and oblige the Revenue to actively disprove any R&D claim that is submitted alongside pre-emptive evidence. If so, that would be a game changer for defending legitimate claims.
Richard Lewis MISTC
Senior Technical Consultant
