A tax tribunal has made a landmark ruling against HMRC, by declaring that the construction taxpayer (Quinn) was validly entitled to claim SME research and development (R&D) tax relief totalling approximately £1m, even though this work was specifically undertaken to order for a customer, which would normally mean the ‘subsidised’ rule would prohibit eligibility under the SME scheme.
Quinn’s building projects usually generate new technological knowledge or capability, which the company was then able to carry forward and exploit in future commercial work. HMRC accepted that Quinn was an SME, that it had carried out R&D activities and had expended sums on the R&D which it was entitled to deduct in computing its taxable profits for the relevant periods for corporation tax purposes. However, HMRC denied Quinn the enhanced SME R&D relief (worth an additional tax reduction of 25p for every £1 of eligible spend) arguing that the R&D was carried out during the time where Quinn was providing services to its clients for which it received payment to cover the claimed R&D expenditure, and so was ‘subsidised’ indirectly, and thus it should be claimed as RDEC R&D relief instead (worth only an additional tax reduction of 11p for every £1 of eligible spend).
The case focused on the complex technical argument over what ‘subsidised’ was intended to include. The tribunal ruled that a fair reading of the legislation 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 stated 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 it its commercial contracts with its clients entered into in the course of its ordinary trading activities’.
The appeal against HMRC’s initial view was therefore granted by the Tribunal. HMRC have not made an appeal against the Tribunal decision, as at the time of writing, so the precedent is hopefully now set.
This is an interesting judgement which will allow many taxpayers to now claim R&D relief under the more generous SME scheme rather than under the RDEC scheme. Previously submitted claims should be reviewed to see if they are still within time to be amended.