A new ruling prevents HMRC from narrowing the scope of R&D tax relief

A recent First-Tier Tribunal (FTT) ruling potentially has big implications for companies that claim for R&D tax relief. The case, full details of which are yet to be published, means that QLC’s clients can continue to claim with confidence.

The majority of claims for R&D tax relief are made using the Small and Medium Sized Enterprise (SME) scheme. This is more lucrative than the other scheme (Research and Development Expenditure Credit) which is predominantly used by Large companies. However, in 2020 HMRC began arguing that many companies should actually be using the less lucrative RDEC scheme. This was because of their interpretation of two key areas of the R&D legislation found in the Corporation Tax 2009. The first was the idea that if a company carries out R&D as part of a contract, then that R&D is ‘subcontracted’ and is therefore not valid under the SME scheme. The second was HMRC’s argument that if a company receives payment to complete work – and that work involves R&D – then the expenditure has been ‘subsidised’. Again, the impact of this was to make that expenditure claimable only under the less lucrative RDEC scheme.

If HMRC’s position was correct, this would have meant that many companies would find it harder to claim. For example, let’s say that Engineering Limited has entered into a contract to supply a product that it had designed and manufactured to a customer. Engineering Limited invested in R&D to develop that new product and incurred significant R&D expenditure. HMRC’s position seemed to suggest that because it was being delivered to a customer, and because the customer had paid for the product, there was a chance none of that R&D expenditure could be claimed back. Even if it could be claimed back, Engineering Limited would not receive the full financial benefit of using the SME scheme.

Most of QLC’s clients have always used the SME scheme. This has enabled us to ensure that you are able to gain the full benefit of investing in R&D. However, if HMRC had been able to successfully argue that any company doing work for clients could not claim using the SME route, then this would have penalised many of you simply for doing R&D with a customer in mind and receiving payment for work carried out.

As QLC has successfully argued in other cases, HMRC’s interpretation of the legislation would prevent almost any company from claiming the higher rate of tax relief. Therefore, the most recent FTT decision is a landmark moment as it seems to have prevented HMRC tightening the scope to an overly restrictive level of who can claim for R&D tax relief.

The full details of the decision have not yet been released, but the judge stated in her verdict: “It would be wholly out of kilter with the overall SME scheme if an SME were to be denied relief solely because it seeks to recover some or all of the relevant costs under its commercial contracts with its clients.

“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.”

QLC ensures it always stays abreast of the latest developments in the world of R&D tax. Since the end of 2020, we’ve altered our processes to ensure that we can continue enabling our clients to claim using the SME scheme. However, the recent Tribunal decision is a big moment as it means that HMRC will be unable to prevent companies from legitimately claiming for the SME scheme.

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