In Stage One Creative Services Limited v HMRC [2024] TC09358, a company's claim for SME R&D tax relief was upheld by the FTT, which found that the relevant expenditure was not subsidised nor was it incurred in relation to activities which were contracted out to it.
- Stage One Creative Services Limited (SOCS) claimed SME R&D tax relief for qualifying expenditure incurred on projects.
- HMRC issued Discovery assessments for accounting periods ending 31 December 2017 and 2018 and Closure notices for accounting period ending 31 December 2019, rejecting the claims for R&D relief.
- HMRC argued that relief was unavailable because the expenditure was Subsidised, or the R&D activities were Contracted out to SOCS.
- SOCS Appealed to the FTT.
The FTT found:
- The expenditure was not subsidised.
- SOCS contracted with clients to provide a specified end product or service for an agreed price.
- The price agreed in the contract may not have been sufficient to cover actual R&D costs incurred.
- The contract did not create a clear link between the amount paid by the client and the R&D expenditure incurred.
- SOCS did not expect to receive payment for their R&D costs. The expenditure was simply an incidental part of the project and the clients did not undertake to reimburse such expenditure for which there was no specific provision in any contract.
- Price increases were not directly related to R&D and were largely attributable to elements coming in and out of scope.
- SOCS was not carrying on activities which were contracted out to it:
- The contractual obligation for SOCS was to deliver a specified project in return for an agreed price.
- The R&D activities were incidental to the main contractual obligations and were not considered 'contracted out' work. SOCS undertook R&D activities at its own economic risk, with no provision in the contracts for reimbursement of R&D costs.
- SOCS retained ownership of the intellectual property generated from the R&D and could use it for future projects.
The FTT also considered the validity of the discovery assessments and whether there had been a prevailing general practice around contracting and subsidised expenditure. The FTT concluded that there was a prevailing general practice pre-2021 that was different from HMRCs current position.
The FTT allowed the appeal.
Editor's comment
In December 2024 HMRC confirmed that they will not appeal this decision or the decision made in Collins Construction Limited (CCL) v HMRC [2024] TC09332. Further guidance from HMRC is expected in February 2025. Taxpayers with existing enquirers will be contacted in January 2025
For accounting periods beginning on or after 1 April 2024, significant changes have been introduced to the rules for claiming relief on contracted-out R&D and subsidised expenditure. Under the new definition of 'contracted out' the entity entitled to claim relief is the one responsible for making the key decisions about the R&D. See R&D: Contracting out R&D & Externally Provided Workers (EPW).
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