Contracted SME R&D Relief tested in First Tier Tribunal (FTT)
Quinn (London) Limited v HMRC, 27 October 2021
The FTT sought to address, inter alia, a specific requirement that needs to be met for a company to claim the much more generous SME (Small or medium enterprise) research and development relief instead of the RDEC relief.
The case tested the interpretation of the subsidised rules (CTA2009, s 1138) i.e., in essence, if the R&D project is subsidised by a third party, SME R&D relief is not available.
In many cases this is easily identifiable if companies are in receipt of state aid/subsidies etc.
In this case and for many SME companies who undertake development projects, funds are required to operate (trade), and so the funds can only be derived by undertaking contracts that require the development of new and technologically advanced products, systems and services.
HMRC argued that if a client contracted a company to provide such products, services etc, this should be treated as a subsidised development as the client is paying for the development and hence SME R&D relief would not be available. This appeared to be a continuation and extension of the Haddee Engineering Co Limited v HMRC case, in which HMRC successfully argued that contracting client met the claimed expenditure of the company who they had contracted to provide the product, service etc.
In the Quinn case, HMRC considered that expenditure was indirectly met by the contracting business as a fee would ultimately be paid for the product, service etc, albeit not directly as in the Haddee v HMRC case.
Quinn, however, argued that this was not the case, as the client had paid solely for a finished service, product etc under a commercial agreement, and it was for Quinn themselves to determine how the service, product etc was provided whilst also baring the cost of developing and providing the service, product etc.
The commercial agreement between the client and Quinn was not dependent on the actual cost Quinn would incur in developing and providing the product, service, albeit when determining the cost of the contract Quinn as a commercial entity would need to attempt to price the contract at a rate which would cover its costs.
The FTT found that there was no clear link between the R&D expenditure incurred by Quinn and the price paid by the contracting business, so the development could not be considered as being subsidised and hence the more beneficial SME R&D relief was available to Quinn.
The FTT found that the contracts between Quinn and its client were not an agreement to pay for R&D costs and expenditures. Quinn did not carry out the R&D for payment but simply used R&D to meet the requirements of the contract agreed.
If HMRC had successfully argued that developments that were driven by a contract to provide a product, service etc were subsidised, the R&D SME scheme would be limited to blue sky thinking companies only and so be out of kilter with the aims of the scheme.