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ForrestBrown secures landmark tribunal victory against HMRC

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ForrestBrown has secured a landmark victory against HMRC in a tribunal case dealing with SME R&D tax relief and subsidised research and development (R&D) expenditure.

Our client, Quinn (London) Limited, a construction company with a specialist heritage division, was wrongly denied SME R&D tax relief funding totalling over £1m.

Subsidised expenditure and client-led R&D

The First-Tier (Tax) Tribunal case concerned the interpretation of subsidised R&D expenditure.

The legislation for R&D tax relief restricts the amount of relief available to SMEs for R&D that has already been funded by other means, such as a grant or subsidy. HMRC however, argued that if R&D activities were part of a project to deliver goods or services that were being paid for by a client, any expenditure on that project should also be treated as subsidised.

Quinn’s R&D projects, like many other construction firms, are typically carried out for clients. HMRC, therefore, considered all of Quinn’s R&D to be “subsidised”. This decision excluded Quinn’s expenditure from SME R&D tax relief, denying the company valuable funding that they were entitled to as a reward for their investment in innovation.

This interpretation has not held and that’s why we’re delighted that the tribunal judgement was a resounding victory for Quinn (London) Limited.

Delivering the best advice

At ForrestBrown, our goal is always to resolve HMRC R&D enquiries efficiently with the best possible result for our clients. In this case, that meant taking the extra step of appealing the enquiry outcome to the tax tribunal.

Adopting a clear and consistent strategy from the outset has been pivotal to our success, and we are delighted to have been able to deliver this result for our client.

We are absolutely delighted with the result. It has been a long journey but working so closely with the ForrestBrown team gave us confidence that our hard work would eventually pay off.

Seamus Quinn, Managing Director of Quinn (London) Limited

Good news for UK SMEs

By successfully appealing HMRC’s decision, we have prevented an incorrect narrowing of the scope of the incentive and protected the ability of SMEs to claim this essential relief

Not only is this a landmark moment for Quinn, but it’s also one for all those SMEs who may have been wrongly denied access to vital SME R&D tax relief funding, especially in these very challenging times. Although in this case, the construction sector was under scrutiny, client-led R&D takes place in almost every industry.

In her verdict, judge Harriet Morgan noted: “…it would be wholly out of kilter with the overall SME scheme if an SME were to be denied enhanced R&D relief solely because… it seeks to recover some or all of the relevant costs of the R&D under it its commercial contracts with its clients” (Paragraph 47).

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.

Judge Harriet Morgan’s verdict (Paragraph 47)

Headwinds still prevail

With fraud and error within R&D tax relief figures receiving intense scrutiny, HMRC is under pressure to ensure that the UK taxpayer’s money is being well spent. Their focus on subsidised expenditure and contracted out R&D appears to have been an important and, in our view, misjudged part of this effort.

Our response to the government’s Consultation on R&D tax relief explains where we think efforts should be focused. In the meantime, while this thorough judgement decisively overturns HMRC’s position on subsidised expenditure, it is not a binding decision. HMRC may continue to challenge the eligibility of customer-led R&D projects.

ForrestBrown leads the R&D tax relief industry and offers its clients unmatched technical expertise and experience in managing disputes with HMRC. If you are facing a challenge from HMRC into your R&D tax relief claim or have a question about this tribunal judgement, we would be happy to advise you on the best course of action.