Gripple Ltd v Revenue and Customs

Enhanced research and development relief depends on satisfying the detailed statutory conditions governing qualifying expenditure. A court should apply those conditions individually rather than adopt a general generous construction based on the purpose of the relief.

Payments by one group company to another do not constitute staffing costs merely because they economically fund the remuneration of a director who works for both companies. Staffing costs require emoluments paid by the claimant company to its own directors or employees. Separate companies in a corporate group must ordinarily retain their separate identities when fiscal legislation is construed, unless the legislation provides otherwise.

Gripple claimed enhanced research and development relief for payments made to Loadhog Limited during its 2004, 2005 and 2006 accounting periods. The payments represented a recharge of part of the salary paid by Loadhog to Mr Hugh Facey, who was a director of both companies and carried out research and development work for Gripple.

The General Commissioners dismissed Gripple’s appeals, holding that the payments were not staffing costs under paragraph 5 of Schedule 20 to the Finance Act 2000. Gripple appealed to the High Court on a question of law under section 56 of the Taxes Management Act 1970. The central issue was whether the recharged sums constituted staffing costs paid by Gripple to, or in respect of, Mr Facey.

The appeal was dismissed.

1. Construction of the relief. Schedule 20 to the Finance Act 2000 was a detailed and prescriptive code containing carefully defined conditions. The court rejected the submission that its general purpose required a generous or broadly purposive construction. The conditions had to be considered one by one.
2. Separate corporate identity. Companies in a group are ordinarily separate entities for United Kingdom tax purposes. The court rejected the submission that Gripple and Loadhog should be treated as one commercial entity, or that their separate identities should be disregarded when construing the fiscal legislation. The detailed provisions dealing with connected persons showed that the legislation already addressed corporate groups in specific ways.
3. Staffing costs. The sums recharged by Loadhog were not emoluments paid by Gripple to Mr Facey. During the relevant periods his emoluments were paid by Loadhog. The result would have differed if Loadhog had acted merely as Gripple’s payroll agent, but the facts and tax returns did not support that analysis.
4. Paragraph 5(2). The reference to amounts paid “to, or in respect of” directors or employees did not enlarge the definition of staffing costs in paragraph 5(1). It explained which staffing costs, as already defined, were attributable to relevant research and development. National insurance and pension contributions illustrated payments made in respect of directors or employees without being paid directly to them.
5. Externally provided workers. The payments could not qualify under paragraphs 8A to 8E because Mr Facey was a director of Gripple and therefore failed the clear condition in paragraph 8B(b).
6. The Commissioners correctly applied the law to the transactions actually entered into. The fact that the group could have arranged the transactions differently so as to obtain relief could not justify relief where the statutory conditions were not met.

General Commissioners dismissed Gripple’s appeals against HMRC’s amendment of its 2004 self-assessment return and discovery assessments for 2005 and 2006.

High Court (Chancery Division) heard the case stated under section 56 of the Taxes Management Act 1970 and dismissed the appeal.