R&D expenditure not subsidised

In Quinn (London) Ltd v HMRC [2021] TC08321, the First Tier Tribunal (FTT) found that R&D undertaken as part of a larger project had not been subsidised and enhanced relief under the SME Scheme was available.

• Quinn (London) Ltd (Quinn) was a construction company focussing on refurbishment projects for clients undertaken under JCT Standard Building Contracts Without Quantities.
• These contracts obligated Quinn to provide the works to a suitable standard for an agreed fixed price.
• Certain projects undertaken by Quinn generated new technological knowledge and capability which they were able to take forward any apply in future commercial work.
• This included the development of novel techniques for refurbishing heritage properties.
• Quinn included R&D claims on its tax returns in respect of such expenditure under the SME Scheme. 
• HMRC denied the R&D claims on the basis that the expenditure on which the relief was claimed was Subsidised by Quinn’s clients.
• Quinn appealed to the FTT.

The FTT allowed the appeal finding that:

• Expenditure is subsidised if it is met by a person other than the SME. That should be taken to mean the money is provided such that the SME is not subject to the cost.
• There was no clear link between the price paid by the client and the R&D expenditure incurred by Quinn. It was not subsidised as:
  • The contracts between Quinn and the clients were for the provision of specified works at an agreed price.
  • That price may or may not be sufficient to cover Quinn’s costs.
  • Expected costs relating to R&D were factored into the price but not specifically broken down or charged, they were not met directly by the client as a result.
  • The contracts did not mean that the client agreed to reimburse or pay specific costs on Quinn’s behalf which could have meant the expenditure was subsidised.
  • Quinn did not agree to carry out R&D with associated costs repaid, the R&D was undertaken as part of the larger project.

Comment

While FTT decisions are not binding, the result of this case is encouraging for businesses claiming what is a valuable relief.

The verdict of this case differed to that of Hadee Engineering Co Ltd v HMRC [2020] TC07969. The level of evidence that Quinn provided made it clear that there was no link between the expenditure that had been incurred and the payments received from their client. The contracts also made it clear that any IP generated remained with Quinn.

Useful guides on this topic

R&D: SME Tax Credit scheme
What Research & Development (R&D) schemes are available for small and medium-sized companies undertaking R&D? How to make an R&D claim? What are the qualifying costs and how much can be claimed?

R&D Zone: State Aid and Subsidised expenditure
How do grants and state aid impact R&D claims?

R&D Tax Relief: Overview
What is R&D Relief? How does it work? Why does the size of the company matter? What is sub-contracted R&D? How do I write an R&D Report?

Research & Development Tax Reliefs: At a glance
This is a freeview 'At a glance' guide to Research and Development (R&D) relief.

R & D & Patent Box
Find out all about Research & Development and Patent Box tax reliefs.

R&D claim fails key criteria
In Hadee Engineering Co Ltd v HMRC [2020] TC07969, the First Tier Tribunal (FTT) upheld the appeal in part for closure notices regarding R&D claim enquiries. In the main, the appellant failed to meet the qualifying criteria.

External links

Quinn (London) Ltd v HMRC [2021] TC08321