In Pyreos Ltd v HMRC4, the taxpayer has successfully appealed HMRC’s decision to disallow tax relief for expenditure incurred on research and development (R&D).
Pyreos Ltd (the Appellant) made claims for relief under section 1119, Corporation Tax Act 2009 (CTA), during 2010 and 2012. The claims relied on the Appellant being an autonomous small or medium-sized enterprise (SME), as defined in Commission Recommendation (EC) no 2003/361 (the EC Recommendation).
Under the EC Recommendation, the composition of the shareholdings in the company in question is relevant to determining if such company is an autonomous SME. During the relevant years, Siemens Technology Accelerator GmbH (Siemens) owned between about 49% (in 2010) and 36% (in 2012) of the Appellant’s issued share capital. Ordinarily, under the EC Recommendation5, as Siemens held over 25% of the Appellant’s shares, the two companies are considered “Partner Enterprises”, and as such the Appellant would not be an autonomous SME entitled to the relief sought. However, the EC Recommendation provides that a company can still qualify as autonomous if the 25% threshold is reached (or exceeded), by investors, including venture capital companies (VCCs).
The material issue for the First-tier Tribunal (FTT) to consider was whether Siemens was a VCC. If it was, HMRC accepted that the Appellant could be considered an autonomous SME and would be entitled to the relief sought.
The FTT noted that the concept of a VCC was not defined in the EC Recommendation, and it had not been referred to a definition in the present context. As a result, it considered that the phrase was to be construed “in its dictionary sense of a company whose interest is in maximising the financial return on its investments in new businesses and speculative ventures.” It noted in this regard that, whilst matters of commercial risk and the date of realisation of potential profits will motivate a VCC, the “day-to-day executive management of the subject concerned in which it invests, would not” and the “nature and pattern of their trading, other than their profitability, would not ordinarily be a matter of concern.” Overall, the FTT was of the view that a VCC’s interest in such a company was “in the balance sheet value and revenue generation of its investments, and the ability to realise these.”
Against that backdrop, the FTT considered that the evidence in the instant case showed that Siemens’ objective was “to maximise the financial worth of the Siemens Group’s orphan technology.” It noted that the relevant IP was not of use within the Siemens Group’s own business structure and that so far as the Siemens Group was concerned “its value was so trifling as to be commercially irrelevant.” The FTT also noted that, whilst the Appellant did contract with Siemens and/or the wider Siemens Group for certain supplies, such contracting was short-term and conducted at arm’s length. In addition, the management of the Appellant was conducted independently of Siemens, and Siemens did not involve itself in matters of the Appellant’s routine management.
The FTT concluded that Siemens was to be considered a VCC throughout both the relevant years (2010 and 2012) under the EC Recommendation. As a result, the FTT concluded that the Appellant was an autonomous SME and that it was, therefore, entitled to the tax relief sought by virtue of its R&D expenditure. The Appellant’s appeal was therefore allowed.
This was a good result for the taxpayer, particularly considering that the 25% threshold was exceeded by a considerable margin. The decision also provides helpful guidance on the definition of VCCs in the context of section 1119, CTA, and the EC Recommendation. Whilst the FTT considered that ascertaining the meaning of VCCs in this context gave rise to issues of both fact and law, the decision demonstrates the importance of the surrounding factual circumstances and thorough appeal hearing preparation so that the facts relied upon can be established before the FTT.
The decision can be read here.