HMRC “Subsidised R&D” Court Defeat

“Landmark” court defeat for HMRC means good things for the R&D industry.

The courts ruled in favour of SME, Quinn London Limited, after HMRC had originally denied £1m worth of SME R&D tax relief to the construction firm.

HMRC denied the relief as it attempted to tighten an interpretation of the subsidised expenditure portion of the R&D legislation. 

They argued that due to the fact that Quinn London Limited had been paid to carry out R&D from the outset, they had already been remunerated for their efforts – disqualifying them from the SME tax credit.

However, Judge Morgan stated that: “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.”

Subsidised expenditure would traditionally relate to grant funding or other state aid relief – such as Bounce Back Loans. But HMRC were trying to expand that interpretation to include any R&D expenditure that had been incurred after a client had signed a contract.

On the note of Bounce Back Loans: there is a major issue with 19-20 & 20-21 claims where a company has received a BBL and completed R&D. The link below should help.

You can read more about BBL’s and R&D here. Avoid a potential enquiry trap!

In the case of subsidised R&D, HMRC had believed that though Quinn London Limited had met the criteria for SME R&D tax relief, they were only eligible for the RDEC tax relief, which is ordinarily accessed by larger organisations and is far less generous. 

The difference between the two schemes, that Quinn was trying to claim, was calculated to be upward of £1m.

This ruling is good news to the entire R&D community. It allows organisations to initiate works that they know is R&D from the outset, safe in the knowledge that they can claim for R&D tax relief in the future.