Landmark R&D Tax Relief win against HMRC has important implications for SMEs

A recent landmark tribunal victory against HMRC, pertaining to a disputed £1 million Research & Development (R&D) tax relief claim, Quinn (London) Limited v Revenue & Customs, has important implications for all limited companies seeking to claim R&D tax relief, particularly Small and Medium Sized Enterprises (SMEs).

The landmark First-tier Tribunal (FTT) judgment regarding SME R&D tax relief and subsidised R&D expenditure was based upon an appeal made against HMRC’s decision to reject the construction company, Quinn’s, R&D tax claims on the basis that the expenditure was subsidised by the company’s clients.

Stewarts, the litigation law firm behind the major tribunal win against HMRC’s decision to deny SME enhanced R&D tax relief, explains the case:

The issue in dispute

An SME must meet a number of conditions to qualify for enhanced R&D relief. Apart from one condition, HMRC accepted these as being met by Quinn.

To qualify for enhanced R&D relief, the relevant R&D expenditure must not be “subsidised expenditure”, according to section 1138(1)(c) of the Corporation Tax Act 2009. It was this condition that HMRC considered was not met.

HMRC argued that Quinn was not entitled to the enhanced R&D relief because the R&D was carried out in the course of Quinn providing services to its clients for which Quinn received payment in sufficient amount to cover the claimed R&D expenditure, and so was “subsidised” indirectly. Quinn contended that its clients did not meet Quinn’s R&D expenditure and paid only for the finished construction works, and so the R&D itself was not “subsidised”.

Tribunal Judge Harriet Morgan ruled that a fair reading of 1138(1)(c) would conclude that it is not intended to apply in circumstances such as Quinn completing R&D in the course of providing its services where there is no clear link between the price paid by the customer and the R&D expenditure.

The Tribunal Judge went on to hold at 47[(5)] that “it would be wholly out of kilter with the overall SME scheme if an SME were to be denied enhanced R&D relief solely because, as is usual and to be expected of an entity carrying out a trade on a commercial basis, it seeks to recover some or all of the relevant costs of the R&D under its commercial contracts with its clients entered into in the course of its ordinary trading activities. Indeed, if HMRC’s approach were to be adopted, the circumstances in which an SME could claim enhanced R&D relief would seem to be confined to those where it has no prospect of exploiting the R&D for commercial gain.”

Source: https://www.stewartslaw.com/news/stewarts-secures-major-tribunal-win-in-1m-appeal-against-hmrc-decision-to-deny-sme-enhanced-rd-tax-relief/

Commenting on the case and the wider implications thereof, Simon McCarthy​, R&D Senior Tax Manager at Beavis Morgan, the R&D Tax Relief specialists, says: “Great precedence has been set here, which states that, even though a company was ultimately paid by a client, after the fact, for a finished product/service, a firm can still claim R&D tax relief, for the costs that it bore, during the R&D process in and of itself.

“The argument that was presented stated that just because a project was commercially viable, should not mean that a limited company could not claim R&D Tax Relief for the costs bore during its undertaking, as the whole purpose of the scheme itself is to promote companies to continuously innovate, in bringing new products/services to market.

“This is in fact a point HMRC made themselves, in their last review of the scheme, when they noticed that funds being claimed for under R&D Tax Relief and patent box were not proportional in nature, when the stated purposes of the schemes, as a whole, assert that they should be.”

R&D Tax Relief provides excellent incentives for UK companies to invest in innovation, but the claims process itself can be complicated and convoluted, with lengthy paperwork involved and plenty of room for error. It is therefore essential that businesses seek specialist advice to ensure that all associated risks are minimised and that all aspects of the process are taken care of, thereby maximising one’s chances of getting back all the tax benefit owed to you, through the undertaking of said innovative activities.

For further information, or to arrange a no obligation preliminary meeting on how your company could qualify under the R&D Tax Relief scheme, please contact us.