In a landmark case, Collins Construction Limited has successfully challenged HMRC’s denial of its research and development (R&D) tax relief claims. The victory has implications for other businesses claiming R&D tax relief, so let’s take a look at the details and what it means for others… 

The background…

Collins Construction Limited, a specialist in refurbishment and fit-out projects, appealed against HMRC’s rejection of its claims for R&D tax relief. The disputed amounts were substantial: a repayment of £573,056.72 for 2018 and an R&D tax credit of £2,670,972.94 for 2019.

HMRC’s rejection was based on two main arguments:

1. The expenditure was ‘subsidised’
2. The R&D activities were ‘contracted out’ to Collins

However, the First-tier Tribunal (FTT) ruled in favour of Collins, concluding that the company’s twenty seven projects during these periods qualified for R&D tax relief.

The ‘Subsidised Expenditure’ Argument

HMRC argued that the payments Collins received from clients for overall project costs constituted ‘subsidised expenditure’ under the Corporation Tax Act 2009. They claimed this meant the R&D expenditure was ‘met directly or indirectly by a person other than the company’.

The tribunal disagreed, referencing a previous case which held that standard commercial payments for services did not constitute a subsidy for R&D purposes. This interpretation was further supported by an upper tribunal decision.

The ‘Contracted Out’ Argument

HMRC’s second argument was that the R&D activities were ‘contracted out’ to Collins, which would disqualify the related expenditures from R&D tax relief. They argued that since Collins had contracts with clients for design and construction services, any R&D undertaken to fulfil these contracts should be considered ‘contracted out’.

Collins successfully countered this by demonstrating that the R&D activities were not explicitly required by the contracts or within the parties’ reasonable contemplation when the contracts were signed. The R&D was undertaken reactively to address unforeseen technical challenges during the projects.

What does this mean for other businesses?

This ruling is significant for other claimants, particularly those in the construction sector, seeking R&D tax relief. It reiterates that genuine R&D activities should not be denied relief due to technicalities in contract interpretation.

Key takeaways include:

1. Clear contracts and good documentation are crucial when claiming R&D tax relief.

2. Companies must demonstrate that R&D was done proactively and not as a pre-agreed part of the contract.

3. Standard commercial payments for services that involve R&D do not necessarily constitute ‘subsidised expenditure’.

HMRC’s response and future outlook

Importantly, HMRC has decided not to appeal this decision or a similar one (Stage One Creative Services Limited).

They are currently reviewing the broader implications of these decisions on appeals, enquiries, and those affected by the subcontracted and subsidised R&D issues.

HMRC plans to publish additional guidance on this matter imminently. This suggests that while HMRC’s stance on subcontracting rules may not change immediately, there could be shifts in policy or interpretation in the near future.

What this could mean for you…

If your business engages in R&D activities, particularly as part of larger commercial contracts, this ruling could have significant implications for your tax relief claims. It’s important to:

1. Review your contracts to ensure R&D activities are not explicitly included as deliverables.
2. Document any R&D undertaken in response to unforeseen challenges during projects.
3. Keep clear records of R&D expenditure separate from general project costs.

Next steps…

While this ruling is good news for many SMEs, R&D tax relief remains a complex area. As the landscape continues to evolve, it’s crucial to stay informed and seek expert advice.

If you’re unsure about your R&D tax relief claims or want to explore your eligibility in light of this recent ruling, please get in touch.