Accelerate Corporation Ltd v Revenue and Customs (CORPORATION TAX - discovery assessment - whether made in time) [2025] UKFTT 419 (TC) (10 April 2025)

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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Accelerate Corporation Ltd v Revenue and Customs (CORPORATION TAX - discovery assessment - whether made in time) [2025] UKFTT 419 (TC) (10 April 2025) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2025/TC09485.html Cite as: [2025] UKFTT 419 (TC)

DECISION

Introduction

1. The appellant (Accelerate) appeals against a discovery assessment for the accounting period ended 30 September 2016 issued on 10 August 2022 for the amount of £73,807.40.

Background

2. Accelerate provides services to other companies; Mr Thomson is the sole director and employee. In the accounting period in question, Accelerate issued a number of invoices in respect of supplies of services to a customer, Intelligent Organics Limited (IOL), amounting to £369,000. IOL did not pay the amounts owing.

3. Following a VAT visit by HMRC relating to these invoices, in which it was noted that Accelerate's financial statements for the accounting period did not include either the income from the invoices nor the resulting debt, HMRC opened an investigation into Accelerate's corporation tax position. The investigation covered a number of areas: those which were not relevant to this appeal are not discussed further in this decision. Mr Thomson also made a number of criticisms of HMRC in correspondence and in the hearing; these are not matters within our jurisdiction and so we have not referred to them further here.

4. Following correspondence and discussion, HMRC issued the assessment under appeal. This (as relevant to this appeal):

(1) increased Accelerate's revenue for the accounting period ended 30 September 2016 to include the sales invoiced to IOL;

(2) disallowed claimed expenditure on consultancy services;

(3) allowed trading loss relief for the loss arising from the unpaid IOL amounts in the accounting period ended 31 March 2019.

5. Part of the trading loss relief in the accounting period ended 31 March 2019 was carried back to reduce profits in the accounting period ended 30 September 2017.

6. Accelerate contend that the relief for the IOL debt should be recognised for tax purposes in an earlier accounting period and so should set against the income recognised from the sales to IOL in the accounting period ended 30 September 2016. HMRC contend that there was no evidence to support such earlier relief.

Disallowed expenditure

7. HMRC's assessment disallowed expenditure on consultancy services on the basis that no documentary evidence to support the claimed deductions had been provided. HMRC's statement of case and skeleton argument included detail of the decision to disallow these amounts.

8. The disallowed expenditure on consultancy services was not referred to in Accelerate's grounds of appeal and Mr Thomson did not make any submissions with regard to these in the hearing or in his skeleton argument for Accelerate. There was no evidence in the bundle that supported any deduction for these amounts.

9. On this basis, we find that the claimed expenditure on consultancy services was correctly disallowed and have not discussed this aspect of the assessment further below.

Accounting basis applicable to company accounts

10. There was initially some dispute as to the correct accounting treatment to be applied with regard to Accelerate's accounts and the assessment raised by HMRC.

11. Mr Thomson stated that he considered that as Accelerate was a small company it operated "practically on a cash basis" and the correspondence indicated that there may have been some suggestion that the assessment and company accounts should be regarded as being prepared on the cash basis. In the hearing, Mr Thomson agreed that company accounts were required to follow generally accepted accounting practice (GAAP) and that company accounts could not be prepared on a cash basis.

12. For the avoidance of doubt, we find that ss46 & 47 Corporation Tax Act 2009 requires that company accounts must be computed in accordance with GAAP, subject to adjustments required or authorised by law, and that FRS102 requires companies to prepare their financial statements on an accruals basis.

13. The issues which remained to be decided were the validity of the discovery assessment and whether or not relief was available to Accelerate in respect of the debt arising from the IOL invoices which could eliminate the revenue recognised in respect of those invoices in the accounting period under appeal.

Validity of discovery assessment

14. As Mr Thomson disputed the validity of the discovery assessment in correspondence, we have considered whether the discovery assessment was validly issued, although there was little discussion with regard to this issue in the hearing.

15. HMRC's records show that they have not received a corporation tax return from Accelerate for the accounting period to which this appeal relates. Mr Thomson initially disputed this, as he believed that it would have been filed at the same time that the accounts were filed at Companies House. In the hearing he accepted that this was an assumption and that, as there had been some changes within the relevant accountancy firm at the time, the return probably had not been filed.

16. Given the evidence before us, we find that Accelerate did not file a tax return for the accounting period ended 30 September 2016 (and have not since filed a return).

17. On 25 June 2018, as no corporation tax return had been filed within 18 months of the end of the accounting period, HMRC issued a determination under paragraph 36 of Schedule 18 Finance Act 1998 based on the company's accounts. This determination reduced carried forward losses by £15,000 but otherwise did not give rise to a corporation tax charge.

18. Following correspondence relating to the VAT enquiry described above, Officer Paterson concluded that the determination was insufficient and issued the discovery assessment under appeal on 10 August 2022.

19. Paragraph 41 of Schedule 18 Finance Act 1998 allows HMRC to issue a discovery assessment where an officer discovers that an assessment to tax is or has become insufficient (inter alia, and as relevant in this case). The burden of proof (to the civil standard of the balance of probabilities) is on HMRC to show that there has been a relevant discovery and that the conditions for making an assessment were met.

Whether there was a discovery

20. Officer Paterson's evidence was that she discovered that there had been an insufficiency in the course of correspondence and information received relating to the enquiries described above. This was not challenged in cross-examination and so we find as a fact that a relevant discovery was made by Officer Paterson.

Whether the conditions for making an assessment were met - time limit

21. The restrictions in paragraphs 42 to 45 of Schedule 18 Finance Act 1998 do not apply in this case, as no corporation tax return has been filed by Accelerate. The question is therefore whether the discovery assessment was issued within the relevant time limit. The general time limit for making an assessment is four years from the end of the accounting period to which it relates; this is increased to six years where the assessment involves a loss of tax brought about carelessly by the company or a related period (para 46 of Schedule 18 Finance Act 1998)

22. HMRC contended that the insufficiency was brought about by carelessness by or on behalf of the company and that, as the discovery assessment was issued within six years of the end of that accounting period, it was issued in time.

23. HMRC contended that the insufficiency was brought about by carelessness because, in summary:

(1) the company failed to account for over 90% of revenue generated during the relevant period, having failed to include the revenue from sales to IOL in the period;

(2) it did not seek advice on the correct accounting and tax treatment of the sales to IOL and any debts arising therefrom;

(3) it did not keep records, other than amounts paid, of consultancy services for which payments were made.

24. HMRC further argued that a company director exercising reasonable case would have been aware that the company's financial statements did not give a true and fair view of the financial position as they did not include most of the revenue generated in the period and the related assets. They would have sought advice on the correct accounting and tax treatment for the sales to IOL and the debt arising from those sales. They would also have kept records relating to any consideration of the status of that debt and, if it was considered to be bad, would not have continued to provide significant services to IOL. They would also have ensured that proper records were kept regarding the consultancy services.

25. Mr Thomson disputed that there had been carelessness by or on behalf of Accelerate and considered that reasonable care had been taken for a micro SME with a very large internal project generating significant intellectual property in know-how as consultancy services. He considered that advice had been taken and that all income had been reported as required. He also contended that he had paid for forensic accountants who had reviewed the company's bank statements and confirmed that all payments received had been included in the accounts.

26. From the information in the bundle, we noted that accountants acting for Accelerate at a later time agreed in correspondence with HMRC that the sales to IOL should have been recorded in revenue. Even if the resulting debt had been considered to be irrecoverable in the same accounting period in which the sales took place, the revenue of the company should have reflected those sales; the correct accounting treatment for any adjustment for bad debts would require an adjustment to expenses and not a reduction in revenue.

27. With regard to the review of the bank statements, Mr Thomson agreed that this would not have identified amounts which should have been included in the company's financial statements which had not been paid. As such, and given that the results of these reviews were not included in the bundle provided to the Tribunal, we do not consider that such review provides any assistance to us.

28. We were provided with no evidence that any advice as to the correct accounting treatment had been taken or considered. Mr Thomson asserted that he had taken advice, but did not explain what this advice was or how it would have reasonably led to the conclusion that the invoices did not need to be included in the accounts, contrary to GAAP. As already noted, there was no evidence that Accelerate had maintained appropriate records in respect of the consultancy expenditure.

29. With regard to Mr Thomson's assertion that reasonable care had been taken for a micro SME in Accelerate's position, we do not agree. There was no support for this contention, and it appeared to amount to a submission that smaller companies such as Accelerate should not be expected to fully comply with accounting or tax requirements.

30. Companies are required to comply with relevant financial reporting standards for both accounting and tax purposes as well as tax law; whilst there are simplified reporting requirements for the purposes of financial statements for micro SMEs, the accounting principles in respect of bad debts set out above still apply to those companies. The nature of the company's business does not change this position.

31. We find therefore that there was a discovery that an assessment to tax was insufficient and that the insufficiency was brought about by carelessness by on or behalf of Accelerate.

32. As the discovery assessment was raised within the six year time limit permitted by statute where there has been carelessness, we find that the assessment was validly raised.

Whether relief for the IOL bad debt is available

33. There was some discussion as to whether HMRC's decision to assess on the basis that (inter alia) sales to IOL should have been included in Accelerate's revenue was in accordance with generally accepted accounting practice. For the reasons set out above, regarding the question of whether Accelerate's financial statements should have included these amounts in revenue, we concluded that HMRC's decision to include these amounts in revenue in their assessment was correct.

34. It was agreed that IOL have not paid the amounts invoiced to them. The question that remained for this Tribunal was, therefore, whether relief for the amounts invoiced should have been recognised in either of the accounting periods ended 30 September 2016 or 30 September 2017 such that the expense would be deductible either directly or by creating a trading loss that could be carried back against the income recognised from the sales to IOL in the accounting period ended 30 September 2016.

35. The tax treatment of bad debts is set out in ss324, 476 and 479 Corporation Tax Act 2009. These require that a bad debt be claimed as an expense in the accounting period in which the debt is impaired on the balance sheet of the company. It was agreed that Accelerate had not included the debt on its balance sheet and therefore had not impaired the debt on the balance sheet nor claimed an expense for the impairment.

36. A bad debt claimed as an expense, as above, will be deductible in calculating taxable profits of the accounting period in which it arises, under the normal rules for deductions of trading expenditure. Where the bad debt exceeds taxable revenue such that it gives rise to a trading loss, relief for that trading loss is given by in s37 Corporation Tax Act 2010, which provides that a company can obtain relief for a trading loss by deducting the loss from the company's total profits of the accounting period in which the loss is made and in accounting periods falling partly or wholly within the period of 12 months ending immediately before the loss-making period begins.

37. Accordingly, for Accelerate to be able to deduct any trading loss arising as a result of the unpaid IOL invoices in the accounting period ended 30 September 2016, the amount unpaid would need to be recognised for tax purposes either: and deductible in the same accounting period or alternatively create a trading loss in the following accounting period, ended 30 September 2017, which could be carried back to the accounting period ended 30 September 2016.

38. The burden of proof is on Accelerate to show that the bad debt arising from the IOL invoices should be claimed as an expense in either of the accounting periods ending 30 September 2016 or 2017.

Invoices to IOL

39. We consider that it is relevant to set out details of the invoices issued by Accelerate to IOL for accounting period ended 30 September 2016. Firstly, there were a series of invoices described as being for "Scope" and "Output" with the description of the scope and output varying between invoices:

(1) 28 October 2015 - £15,000

(2) 22 November 2015 - £15,000

(3) 22 November 2015 - £15,000

(4) 31 December 2015 - £18,000

(5) 31 December 2015 - £18,000

(6) 28 January 2016 - £18,000

(7) 25 February 2016 - £18,000

(8) 31 March 2016 - £24,000

(9) 30 April 2016 - £24,000

(10) 25 May 2016 - £24,000

(11) 30 June 2016 - £12,000

(12) 30 June 2016 - £24,000

(13) 28 July 2016 - £24,000

(14) 10 August 2016 - £24,000

(15) 18 August 2016 - £24,000

40. From an analysis prepared by Accelerate's accountants in August 2021, Accelerate also issued other invoices to IOL for consultancy services and contractor charges during the accounting period ended 30 September 2016, as follows:

(1) 31 March 2016 - £24,000 - for contractor charges

(2) 30 April 2016 - £24,000 - for contractor charges

(3) 25 May 2016 - £24,000 - for contractor charges

41. In the hearing, Mr Thomson confirmed that all the invoices had been sent to IOL.

42. The total amount of these unpaid invoices to IOL in the accounting period was £369,000, and this was the amount included in the assessment. The Tribunal notes that the amount was incorrectly described in some documents as £369,450 but the calculation of the amount assessed is shown in the statutory review conclusion letter as being based on the figure of £369,000 and so we have taken references to £369,450 as being a typographical error.

Credit notes

43. The Tribunal bundle included two credit notes produced by Accelerate in respect of invoices to IOL, as follows:

(1) 10 January 2016 - £81,000 (invoices from 28 October 2015 to 31 December 2015)

(2) 30 September 2016 - £216,000 (invoices for scope/output between 28 January 2016 and 18 August 2016).

44. None of the invoices for contractor charges were included in these credit notes; the total amount of the invoices included in the credit notes was £297,000.

45. There was some dispute as to the validity of the credit notes, as HMRC contended that these had been produced very late in the process, after the appeal had been made to the Tribunal, and had not been produced during the enquiry process.

46. The Tribunal noted that the grounds of appeal, in December 2022, had included reference to credit notes having been issued during the accounting period and that these were the reason why the invoices had not been included in revenue. As already noted, this was not the correct accounting treatment.

47. In the hearing, Mr Thomson's evidence was that these credit notes were internal documents which had been produced by the bookkeeper who attended Accelerate's offices from time to time. Mr Thomson stated that the bookkeeper would ask if the invoices were going to be paid, and he would have replied that at that time probably not because IOL had turned down a recent investment and so there was no prospect of being paid from that investment, although a new investor had come forward and there were multiple investors being considered.

48. Mr Thomson explained that he had found the credit notes on going through papers some five years after they were created, although he thought that they would have been provided to the first HMRC inspector who had visited the premises at the start of the investigation.

49. Mr Thomson stated that the credit notes had never been sent to IOL, and he did not think that he had discussed the credit notes with IOL.

50. On balance, we do not consider that significant weight should be given to the credit notes in determining when the IOL debt became irrecoverable such that an expense in respect of the bad debt could be regarded as available.

51. This is because, from Mr Thomson's evidence, the credit notes were internal documents rather than formal documents sent to IOL and do not appear to have been produced to write off the debt (there is further evidence set out in this regard below). Accelerate issued the first credit note ten days after issuing the last invoices referred to on that credit note, and proceeded to continue to provide services to IOL, invoicing again 18 days after the credit note was issued. That is not the action of a company that does not believe that it will be paid at all. Similarly, the second credit note was issued only a few weeks after the last invoice referred to in that credit note and Accelerate continued to provide services to IOL in the following accounting period.

52. We also note that no credit notes were produced for a significant proportion (£72,000) of the invoices to IOL, those for contractor charges in March, April and May 2016.

When did the debts become irrecoverable

53. Mr Thomson contended for Accelerate that (in effect) the amounts invoiced to Accelerate should be regarded as irrecoverable at a point in time such that relief should be available in the same accounting period in which the invoices were raised.

54. His actual contention was that the invoices should be removed from the assessment and the company accounts considered correct. This was also his approach to correspondence with HMRC: he seems to have been of the view that as the invoices had not been paid, it did not make any sense for Accelerate to be taxed on the amount invoiced and that he was happy for HMRC to use whatever means they considered to be appropriate for that to happen - on 17 January 2022 in an email, he effectively confirmed this: "If [the invoices have] not been paid after many years then obviously there is no tax liability for Accelerate. If there is a mechanism that you require to remove/cancel such as bad debt relief or credit notes or whatever please apply." He stated that he believed that "bad debt relief" was Officer Paterson's favoured way of looking at the problem and tried to respond to enable such relief to be applied to eliminate the tax charge.

55. As noted above, we do not agree that this is the correct accounting or tax treatment of the invoices issued to IOL in this accounting period and so we have interpreted this submission as above, that the IOL invoices should be treated as irrecoverable at a date that would mean that the amount treated as an expense could be used to offset the amount of the IOL invoices either directly or by way of carried back trading loss relief.

56. HMRC contended that Mr Thomson had stated in correspondence for Accelerate that he considered that the sums had become irrecoverable in 2018 although he had still anticipated at a meeting in March 2019 that some payment may still be received. They also contended that Accelerate had provided no evidence that they had taken any steps to recover the amounts owed and had kept no records to show any contemporaneous view of the debt and the proportion likely to be recovered.

57. On that basis HMRC contended that they had allowed the bad debt to be recognised as an expense in the accounting period ended 30 March 2019; the resulting trading loss was therefore available to set against any profits of the year ended 30 September 2017 and/or carried forward to future accounting periods. It could not, however, be set against profits of the accounting period ended 30 September 2016.

58. We considered all of the evidence provided to us to consider whether an earlier date could be established than that assessed by HMRC.

Evidence - when or whether IOL ceased trading

59. The correspondence referred to by HMRC in their submissions include the comment from Mr Thomson that he considered that the sums were formally irrecoverable when IOL stopped trading in 2018 "as per Companies House". In his witness statement, Mr Thomson referred to a First Gazette Notice for compulsory strike off in December 2017 as an indication that IOL had ceased trading by then, as HMRC contended that there was no evidence that IOL had stopped trading. HMRC also contended that this was not evidence of a cessation of trading as there had also been a previous notice of compulsory strike off but Accelerate had continued to provide services to IOL after that earlier notice.

60. We have considered IOL's Companies House record: this was not included in the bundle. It is, however, a public document and, as it was referred to by both parties, we considered that it was appropriate to take judicial note of it and so review the information in that record.

61. The record shows Gazette notices for compulsory strike off in March 2016 and December 2017, which reflect the company's failure to provide required documents to Companies House. These were each discontinued in less than a month. A notice of compulsory strike off action in May 2018 was suspended shortly afterwards. Although that action was not discontinued it was also not enacted and the company was not struck off. The first application for voluntary strike off by IOL was made in May 2021; that application was withdrawn on 9 June 2021 and a new application for voluntary strike off was made on the same day. That application was suspended in August 2021.

62. On review, we do not consider that IOL's Companies House record supports any earlier date than that assessed for considering the debt to Accelerate to be irrecoverable. We note that compulsory strike off actions can arise from failure to provide required documents to Companies House rather than being clear evidence of any cessation of trading. The first two notices were very quickly discontinued; the third, in May 2018, which has not been discontinued occurred in the accounting period in which HMRC has allowed the debt as an expense (the accounting period ended 31 March 2019).

63. We noted that IOL has not filed accounts since the period ended 31 December 2015 but that is evidence of a failure to comply with company law, not clear evidence of a cessation of trading and, as already noted, it continued to commission services from Accelerate after that date. The voluntary strike off might reflect a cessation of trading but that application was not made until May 2021, well after the accounting period in which HMRC considered that the debt could be regarded as irrecoverable.

Accelerate's view of the IOL debt over time

64. Mr Thomson stated in correspondence that "[at] the meeting with HMRC in March 2019 I had some optimism that in the commercialisation phase of an Intelligent Organics newco that some monies might be paid in the future. Therefore at that time (before 31 March 2019) the invoices for Intelligent Organics Ltd were irrecoverable." Mr Thomson had also stated to HMRC in a meeting in in March 2019 that "There is continued intention that a portion of the sum owed to Accelerate will still be paid by whatever company takes over the commercialisation stage".

65. Mr Thomson's explanation of this in the hearing was that he considered that HMRC had misunderstood the optimism of a business owner, that they would still hope to be paid even if the debt had been considered irrecoverable. He explained that his comments to HMRC had been made on the basis that there was still the potential for IOL to get funding and so some expectation for payment to be realised in the future.

66. It was agreed that Accelerate took no formal steps to pursue the amounts owed by IOL. In correspondence in May 2022, Mr Thomson explained that he had been aware of a succession of serious investment offers made to IOL and that bringing in a collection agency, for example, could damage investment negotiations. He had done what he could by maintaining regular contact with IOL for updates on their search for investors. He considered that continuing to do work with IOL helped to show value to potential investors, to make them more likely to invest and hence increase the chance of payment to Accelerate.

67. In the same email in May 2022, Mr Thomson stated that "practically it became clear by autumn 2017 that the invoices were not going to be paid. As [IOL's] funding efforts failed, at that point I wrote off the invoices as it became clear to all that no payment was possible at that time."

Conclusion

68. Considering all of the evidence before us, we find that Accelerate has not met the burden of proof on it to show that the debt arising from the IOL invoices should be treated as an expense and deductible for tax purposes in an earlier accounting period than that recognised by HMRC. The Companies House information does not support an earlier date. The correspondence between Mr Thomson and HMRC shows a continuing expectation that Accelerate would be paid even after the end of September 2017.

69. We note that in May 2022, Mr Thomson considered that the debt had been written off in "autumn 2017" but no documentary evidence of this was provided. There was no particular reason from the surrounding information, such as Companies' House documentation or otherwise, to support this and we note that Mr Thomson had earlier advised HMRC that he considered that IOL had ceased trading in 2018. We also consider that "autumn 2017" would fall into the accounting period ended 31 March 2019 (as it was an extended accounting period, for the period 1 October 2017 to 31 March 2019).

Decision

70. For the reasons set out above, we find that HMRC made a discovery of an insufficiency of tax and, as the insufficiency arose from carelessness by or on behalf of the company, issued the assessment in time.

71. We also find that HMRC applied the correct accounting treatment in respect of the IOL invoices in making their assessment. We find that there is no evidence to support the contention that the debt arising from those invoices should be treated as an expense in either of the accounting periods ended 30 September 2016 or 30 September 2017.

72. The assessment is therefore upheld and the appeal dismissed.

Right to apply for permission to appeal

73. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

Release date: 10^th APRIL 2025

First-tier Tribunal (Tax)