Quinn (London) Ltd developed a number of novel techniques for refurbishing certain types of properties. The focus turns to the interpretation of subsidised R&D expenditure in this case.
What happened?
Quinn (London) Ltd (‘Quinn’) carried on the trade of providing construction and refurbishment works to a range of clients. During the course of this work, Quinn developed a number of novel techniques for, amongst other things, refurbishment of certain properties.
The legislation for R&D tax relief restricts the amount of relief available to SMEs for R&D that has already been funded by other means, such as a grant or subsidy. HMRC, however, argued that if R&D activities were part of a project to deliver goods or services that were being paid for by a client, any expenditure on that project should also be treated as subsidised.
Quinn’s R&D projects, like many other construction firms, are typically carried out for clients in return for an agreed price (which could be varied under certain conditions).
HMRC was happy that R&D had been undertaken, however, they considered all of Quinn’s R&D to be subsidised, as its clients had indirectly ‘met’ the claimed expenditure by paying Quinn for its services. This decision excluded Quinn’s expenditure from SME R&D tax relief, denying the company the valuable funding that they were entitled to, as a reward for their investment in innovation.
Quinn argued that, on the contrary, it cannot be said that the claimed expenditure was ‘met’ by its clients who, under an entirely commercial arrangement, simply paid a price for a product (i.e. the finished building works). Quinn decided how to complete the work, and bore the costs and risks associated with it.
The outcome
HMRC lost. The tribunal held that without a ‘clear link’ between the price paid by the client/customer and the R&D expenditure, that expenditure could not be said to be subsidised.
Based on the contracts concluded between Quinn and its clients, the clients did not agree to pay or reimburse Quinn for particular costs, such as the claimed R&D expenditure. Further, Quinn did not agree to carry out the relevant R&D on being paid or reimbursed by the clients for doing so. Thus, Quinn’s claims for enhanced R&D relief should be allowed. The Judge commented 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, in doing what is envisaged by the legislation (namely, utilising the relevant R&D for the purposes of its trade), as is usual and to be expected of an entity carrying out a trade on a commercial basis.”
“…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.”
Case take away
This was a decisive win for the taxpayer, preventing what is seen to be the incorrect narrowing of the scope of the incentive, and protecting the ability of SMEs to claim this essential relief.
It doesn’t, however, put an end to the matter.
HMRC have chosen not to appeal the decision (FTT decisions are not binding as they are made on the facts of specific cases if they appealed and lost), but it should be clearly noted that HMRC’s view of the effect of the legislation remains unchanged.
HMRC quietly updated their guidance on subsidised expenditure, and believe that, whilst they may have lost on the subsidised expenditure point, they would have won if they had considered to challenge the claim on the basis that the activities had been subcontracted to the company.
HMRC is challenging customer-led R&D projects. It is therefore vital that you proactively consider contracts entered into and their impact on your R&D tax claim. If you need any help with R&D tax relief, please contact us.