BE Studios Ltd. v Smith & Williamson Ltd

For software expenditure to qualify for research and development tax relief, the work must seek a scientific or technological advance and form part of a systematic project to resolve scientific or technological uncertainty. Innovation, commercial development, or the production of unusual or sophisticated software is insufficient without evidence of the relevant advance or uncertainty.

The statutory scheme operates in two stages. Activities must first fall within the statutory and regulatory definition of research and development. Expenditure must then satisfy the separate conditions governing qualifying expenditure. Recruitment fees and management or support services do not constitute qualifying staffing costs. A professional who merely supplies information is liable only for the foreseeable consequences of the information being wrong.

BE Studios Ltd claimed damages from Smith & Williamson Ltd for admitted negligence in failing to advise it of the availability of research and development tax relief under the Finance Act 2000. After learning of the relief, BE Studios made claims for three accounting periods and received the amounts claimed from the Inland Revenue.

The defendant contended that the payments had been made in error because BE Studios’ activities and expenditure did not qualify. The central issues were whether BE Studios had undertaken qualifying software research and development, whether particular expenditure was qualifying expenditure, and whether the admitted breach caused recoverable loss.

1. The claim was dismissed. The claimant bore the burden of proving both entitlement to the tax relief and recoverable damage caused by the defendant’s breach.

2. The statutory scheme had two stages. First, the activities had to fall within the definition of research and development under section 837A of the Income and Corporation Taxes Act 1988, the Research and Development (Prescribed Activities) Regulations 2000 and the DTI Guidelines. Secondly, the expenditure had to satisfy the conditions in Schedule 20 to the Finance Act 2000.

3. For software to qualify under case (i) of paragraph 21 of the DTI Guidelines, the project had to seek a scientific or technological advance and form the whole or part of a systematic project to resolve scientific or technological uncertainty. BE Studios’ work involved producing improved interactive entertainment software for use on different platforms. It was commercial product development, not software research and development of the required kind. The claimant produced no sufficient evidence of a relevant scientific or technological advance or uncertainty.

4. Recruitment fees were not staffing costs under paragraph 5 of Schedule 20. The statutory scheme distinguished the definition of qualifying activities from the types of expenditure for which relief could be claimed. To the extent that paragraph 29 of the DTI Guidelines purported to make recruitment costs qualifying expenditure, it would be ultra vires the rule-making power.

5. Management and supporting work did not satisfy the requirement in paragraph 5(2) of Schedule 20 that staff be directly and actively engaged in relevant research and development. The evidence also failed to establish that the programmers or any other employees spent the claimed proportions of their working time on qualifying work.

6. As an alternative ground, the defendant had supplied information as part of its accounting retainer. Applying South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, the defendant’s responsibility was limited to the foreseeable consequences of the incomplete information being wrong. Even assuming entitlement to the claimed relief, the claimant failed to prove that timely advice would have enabled it to survive or avoid the losses claimed.

First instance decision. No prior appellate decision is stated in the judgment.