Legal Updates

Commercial - Corporation Tax – Research and Development Relief

The recent judgment of BE Studios Ltd v Smith & Williamson [2005], may mean that companies may find it more difficult to claim tax relief for research and development (“R&D”).

BE Studios designed and produced software for games and other uses. BE Studios hired Smith & Williamson for taxation and planning advice. BE Studies soon went into liquidation and applied for tax relief for R&D for the tax year 30 June 2000. The Inland Revenue made full payment of the sum claimed as well as for the two succeeding tax years. BE Studios brought an action against Smith & Williamson claiming that they had failed to inform BE Studios of the possible tax relief for R&D.

Smith & Williamson contended that:

the failure to inform BE Studios of R&D tax relief was negligent and in breach of their retainer;

  •  the Inland Revenue had however made the payments to BE Studios in error because BE Studios did not if fact qualify for tax relief;
  • BE Studios had therefore not suffered loss and the claim for damages should be dismissed.

The Chancery Division of the High Court held that:

the statutory provision for R&D tax relief consisted of a two-stage process:

▫       Ensuring that the expenditure was capable of being R&D

▫       Inspecting the type of expenditure to ensure that is was indeed for R&D

§        BE Studios’ objective was to produce a better form of software, which was not a novel use as defined by the statute;

§        BE Studios’ recruitment fees and other staffing costs did not consist of supporting activities to R&D;

§        BE Studios was therefore not entitled to claim tax relief for R&D

§        Smith & Williamson were not in breach of their duty to BE Studios because BE Studios was not entitled to R&D tax relief; and

§        the Inland Revenue had erred in awarding tax relief to BE Studios.

The claim was therefore dismissed.

Comment: The Inland Revenue is likely to be more diligent in verifying that claims for R&D tax relief are valid.

If you require further information contact us at


© RT COOPERS, 2005. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.




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