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Quinn v HMRC – three years on. Where are we now?

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27 October 2021 was set to be a big moment for those of us working in R&D tax relief. The much-anticipated judgment in Quinn (London) Ltd v HMRC [2021] UKFTT 437 (TC) – a decision in which ForrestBrown secured a landmark result for its client against HMRC – was handed down by the First-tier (Tax) Tribunal.

Quinn was one of the first cases dealing with a point of law relating to R&D tax relief to be won by the taxpayer. The detailed judgment brought welcome clarity on SME R&D tax relief and the issue of subsidised R&D expenditure. For our client, Quinn, it was equal doses of relief and delight, which marked the end of a long process.

In the period that followed, HMRC made it clear that it disagreed with the decision, but that it would not appeal for tactical reasons. This decision not to appeal while doubling down on its position was always a flawed approach. As Keith Gordon, barrister at Temple Tax Chambers, noted in an article on Quinn for Tax Adviser on 22 February 2022: “The First-tier Tribunal’s decision is the best (and only) authority as to what the statutory words mean and HMRC should abide by it or, if it considers the decision to be wrong, it should take the case to the Upper Tribunal and beyond.”

Almost three years on, and in light of HMRC’s decision not to appeal, what impact has the judgment had on R&D claims? And what is its relevance today in practice?

What was Quinn (London) Ltd v HMRC about?

Before reflecting on its impact, it’s worth reminding ourselves of the facts.

Quinn (London) Ltd is a construction company with a specialist heritage division that delivers complex projects frequently involving the development of new techniques, materials and methods. It made a claim for R&D tax relief, which HMRC enquired into. HMRC accepted the qualifying nature of the R&D activities but rejected the company’s claim for relief under the SME scheme on the basis that its qualifying expenditure was “subsidised expenditure”, falling foul of the restriction at sub-sections 1052(6) and 1053(5) of the Corporation Tax Act 2009.

In the early stages of the dispute, HMRC had pursued an additional line of argument that the company’s activities were “contracted out” under sub-sections 1052(5) and 1054(4) of the 2009 Act. The contracted-out restriction is effectively treated as the partner restriction to subsidised expenditure above, but it has a slightly different (if overlapping) policy motive. Where subsidised expenditure is concerned with R&D paid for by someone else, the contracted out restriction is designed to prevent two parties claiming relief for the same activity.

After several months of back and forth, and after escalation of the matter internally, HMRC conceded the contracted out line of argument. As the senior HMRC officer and Technical Advisor in the case confirmed in his witness statement in the subsequent tribunal proceedings:

My opinion was that…if the [caseworker] considered that the Appellant couldn’t have known that R&D was going to be necessary when it took on the contract, and the activities really were R&D, then I would be content with the conclusion that the activities were not contracted to the Appellant.

For subsidised expenditure, the specific focus of the dispute was always clear. The term itself is defined at section 1138 of the 2009 Act. While this defines and makes reference to notified state aid (at (1)(a)) and grants and subsidies (at (1)(b)), it is the wording at subsection (1)(c) which creates the confusion. Section 1138(1)(c) extends the definition to expenditure that “is otherwise met directly or indirectly by a person other than the company.”

This, HMRC argued, clearly caught payments from a client to a contractor, whether or not those payments were specifically for R&D activities.

Quinn’s commercial projects (a small number of which involved the R&D) were all carried out for clients. It followed, therefore, that all of Quinn’s expenditure on its R&D activities was “subsidised expenditure”, denying access to SME R&D tax relief.

From the outset, our view was that this was both technically incorrect and made little sense on a policy level (once you work through all the possible permutations on a whiteboard). We therefore supported the company in appealing to the FTT.

There have been a number R&D Tax Tribunal decisions in 2024. For a round up on the key points, read our latest article.

Read now

Outcome and application: what it meant for subsidised R&D

Following a two-day hearing, the judge – Harriet Morgan – found in favour of Quinn. The judgment is detailed but the conclusions are well summarised in the statement:

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.

It was a notable result for the taxpayer, of course. But beyond that, the detailed examination of the law and how it should be applied was welcome guidance to the large number of companies and their advisers interested in the application of this point of law.

HMRC chose not to appeal the judgment but made it clear that they disagreed with its conclusions. From a subsequent meeting with HMRC (alongside other advisors), it was confirmed that the decision not to appeal was primarily for tactical reasons. We were told that HMRC has just as much right as any limited company to be tactical in its decision making.

Doubling down on that position, HMRC subsequently updated its guidance on “subsidised expenditure”, confirming its position and entirely ignoring the conclusions in Quinn. This update was extended to an update of the “contracting out” guidance, which took an even broader approach to the application of that test than the one cited in HMRC’s witness statement in Quinn.

This has been the status quo since. If arguments are raised based on conclusions in Quinn, reference is routinely made to the non-binding nature of the FTT judgment.

What happened/happens next?

In practice, uncertainty has continued to reign in the application of the subsidised expenditure and contracted out restrictions, albeit advisers now have greater legal ballast to rely on in adopting a contrary stance to HMRC. This has since been bolstered by an Upper Tribunal judgment: HMRC v Perenco UK Ltd [2023] UKUT 169 (TCC).

Perenco looked at whether expenditure on a gas terminal was allowable expenditure in the context of calculations for petroleum revenue tax. The issue was whether part of the costs had been “met” by a third party, here the owners of the oilfields.

While it dealt with a different point of law, the judgment confirmed that its “approach to this point is very similar to that of the FTT in Quinn.” Although this approval of the reasoning in Quinn does not change the non-binding nature of that decision, it adds substantially to the existing judicial authority that the judgment carries.  

Despite this, HMRC has continued to challenge certain cases and a number have found their way to the FTT. The majority of these are currently held behind two lead cases, Stage One Creative Services Ltd v HMRC and Collins Construction Ltd v HMRC, heard in November 2023 and December 2023 respectively.

In each case, they deal with both restrictions together – contracted out and subsidised expenditure. Judgments are awaited in both cases.*

While those judgments will be hugely important, the noise we hear from both sides is that the losing party will likely appeal. Indeed, absent an about turn from HMRC, perhaps this is required given its stance on the wider applicability of Quinn at first instance.

The outcome we’d hoped for?

It is disappointing that the subsidised expenditure restriction continues to be tested in court some three years after the judgment in Quinn was handed down. While it is not binding precedent, the issues it dealt with were considered carefully in court. The judgment contained a detailed analysis of the law, which has subsequently been approved (if indirectly) by the Upper Tribunal.

Assuming that the judgments in Stage One Creative Services and Collins Construction support Quinn, our hope is that this time they will be followed by HMRC and embedded into its guidance. A lack of clarity has blighted this point of law for too long and a definitive outcome would be a welcome step for claimants and advisers alike.

Looking for enquiry support?

ForrestBrown Director, James Dudbridge, led ForrestBrown’s advice in Quinn and is ideally placed to discuss technical aspects of eligibility for R&D tax relief. If you’re a business wanting to review your commercial arrangements to gain visibility of how the new contracting out rules could impact you, do get in touch.