by Suzanne Clements, Head of R&D.

Recent news in the world of R&D tax credits has focused on those SME companies potentially affected by the Collins Construction Ltd (CCL) and Stage One Creative Services (SOCS) tribunal decisions, which were significant losses for HMRC on points relating to subcontracted and subsidised expenditure.  

On 27 February HMRC updated the Corporate Intangibles Research and Development (CIRD) manual to reflect HMRC’s revised views following these decisions.

The updated pages are:

• CIRD81650 – conditions to be satisfied: subsidies (SME scheme only)
• CIRD84250 – subcontracted activities – meaning of subcontracted

The Research and Development Communication Forum (RDCF) is an HMRC-sponsored forum in which policy representatives meet twice a year with agents, professional bodies, delegates from the industry and business, technical and trade bodies. As a member, Ad Valorem was told that the updates “reflect HMRC’s acceptance of the tribunal’s decisions on subsidised R&D and subcontracted expenditure issues”. 

Until a few years ago there was broad agreement between HMRC and the tax advisory profession as to when these exclusions to SME relief applied. There wasn’t much enquiry work focused on this area.  However, in recent years HMRC has pressed for a much more restrictive interpretation of the legislation and accompanied this with much wider enquiry work, challenging SME claims on the grounds of subsidy or subcontracting. Following a definitive loss in the Quinn (London) Ltd tribunal case (October 2021), HMRC simply revised its CIRD manual to reflect what it would have preferred the decision to have been. This resulted in many claims being refused, despite having been made in accordance with a ‘prevailing general practice’ (PGP) on the basis of the earlier guidance.

Given the weight of subsequent Tribunal decisions, and the clear evidence of a change of interpretation by HMRC in late 2021, the updated CIRD now reflects an about-face from HMRC.

Importantly, the revisions now recognise that the restrictions on a company claiming SME relief in respect of activities contracted to it or its subsidised expenditure are derived from separate subsections in the legislation, and should therefore be considered independently. Following Quinn, there had been a strong bias in HMRC to argue that any work carried out under contract was automatically ‘subsidised’. It is now accepted that there must be a “clear link between the provision of those funds and the expenditure incurred on the R&D project” for it to be subsidised.

Instead of insisting that any R&D carried out by a SME where a client contract was in place for the end deliverable must be disqualified, it is now recognised by HMRC that the question of whether R&D activities were subcontracted should be considered based on the wording of the contract, whether the customer was “aware” of the need for R&D, the autonomy of the subcontractor, its risk level and ownership of IP. 

These updates are in many ways a reversion to the pre-2021 position, although we expect much discussion of nuance.

RDCF members were told that “caseworkers will now begin using this updated guidance to review open enquires and ongoing reviews which we have identified as potentially affected by the decision and will contact customers with next steps.” 

Even before the new CIRD guidance emerged, Ad Valorem had used the decisions in Quinn, Collins and Stage One to push back on the hybrid ‘there was a contract of some sort therefore the R&D must be subsidised’ argument from HMRC in a very long-running and entrenched enquiry case regarding a specialist engineering firm. We had argued that our client’s work met the ‘Collins conditions’ (R&D activities were not required under the terms of contracts, the need for R&D was only identified post contract when on site, intellectual property vested in our client, and  the circumstances in which the contract sum could be adjusted were not pertinent to the R&D activity). We had also argued following Stage One that the claim was made at the time in accordance with prevailing general practice. The result was capitulation by HMRC on the steps of the Tribunal, a significant success for Ad Valorem and the client.

However, it is still unclear what the outcome will be for companies whose claims were rejected, which accepted HMRC’s decisions, and which are no longer in a position to file an amendment.

For accounting periods beginning on or after 1 April 2024, most companies eligible for R&D relief will enter the “merged scheme” or “new RDEC”. When introducing the requirements for new RDEC, HMRC had implicitly signalled that it knew it was losing the subsidy/subcontracting battle, and it was widely felt that this would resolve much of the contention in this area going forwards. Under new RDEC, the end customer must “intend or contemplate” that R&D will be carried out for the claim to belong to it. The general rule is that only the party who takes the decision to undertake or initiate R&D will be able to claim. 

While we envisage that there may still be much room for debate on the subcontracting question, the good news is that under the merged scheme companies in receipt of a subsidy or grant funding for R&D activity will no longer see their R&D relief penalised, as provisions relating to subsidised expenditure are no longer relevant and have been removed from the legislation.

Companies carrying out R&D should seek expert advice in this specialist area. Ad Valorem is an award-winning accountancy practice that is at the forefront of providing specialised R&D tax relief services and is regulated by ACCA, adhering to the highest standards of Professional Conduct in Relation to Taxation. This accreditation exemplifies Ad Valorem’s position as a recognised authority within the field and its ability to navigate the complexities of R&D tax relief, with the highest level of regulatory compliance.

If you have any questions regarding R&D tax credits, please contact us on the details below.

(E) enquiries@advaloremgroup.uk (T) 01908 219100 (W) advaloremgroup.uk