Customer Led Research And Development

New HMRC R&D Approach

Research and Development under the beneficial SME scheme is only allowed if the project is not subsidised.

This is not a new rule, but HMRC have recently started to change their view of when an R&D project is considered to be subsidised.

In some cases HMRC are now treating projects that are undertaken for a specific customer as being subsidised by that customer and therefore ineligible for the beneficial SME R&D relief.

This change of view could impact many businesses, particularly those that claim R&D on bespoke projects that meet the needs of a particular customer.

As this is a change in interpretation by HMRC, rather than new legislation targeting these types of claims, it is unclear whether a court would support HMRC’s new view.  Until a case makes it to court there will be uncertainty and a risk to making SME R&D claims in these circumstances.

Examples of when HMRC’s new interpretation may or may not apply is below.

Example of a situation where HMRC’s new interpretation may deny SME R&D relief

A brewery engages a widget manufacturer to supply it widgets.

The brewery and the widget manufacturer enter into a contract whereby the widget manufacturer will develop and supply a widget with advanced capabilities.

HMRC may now consider the R&D of the widget manufacturer to be subsidised as it is undertaken to perform the customer contract.

Example of a situation where HMRC’s new interpretation should not affect the SME R&D relief

A widget manufacturer undertakes R&D to develop a new widget using new materials and new design features that outperforms the widgets available on the market.

Following the conclusion of the R&D project customers enter into contracts to buy the new widgets.

This R&D project should still qualify for the R&D relief.