The legislation provides that where an SME’s R&D activities are “subsidised” they may forfeit access to the SME scheme into the less generous large company scheme.
The legislation does not provide an exact definition for “subsidised” leaving this open to interpretation. This point of law was
the crux of a recent First-Tier Tribunal case involving HMRC and a construction
firm, Quinn (London) Limited v HMRC (TC/2020/01846).
Quinn had undertaken a large project on behalf of a client and completed an SME R&D claim in respect of innovative work performed. The taxpayer’s qualifying projects included the development of novel techniques for the refurbishment of certain properties.
HMRC did not contest that validity of the R&D projects, they instead contested that the commercial arrangements held between Quinn and its client meant that the R&D expenditure was subsidised and therefore the R&D relief should be denied under the SME scheme.
The Judge ruled in favour of Quinn, suggesting that, if HMRC’s interpretation were to be accepted, this would deny SME R&D relief in all cases other than those that simply had no prospect of commercial gain.
Given that previous tax cases had begun to cast some doubt for taxpayers with regard to subsidised expenditure, this is positive news for SMEs. This should provide comfort that client funded projects can continue to be claimed for under the SME R&D relief scheme.
This is a particularly important result for SMEs who contract with clients to deliver products and services, and R&D is required to be undertaken to deliver those products and services.
Unfortunately, this case does not provide a “catch all”
conclusion and it is worth noting that the exact terms of contract between two
businesses should be reviewed to ensure the R&D belongs with the correct
party. HMRC do regularly argue that the R&D belongs with the end customer
so each case will be judged on its individual facts.
We have built up a considerable amount of experience since the incentives were first introduced by the UK government at the turn of the millennium.