I have incurred Research and Development Expenditure on a project for a specific customer. Can I claim tax relief on the costs?
The short answer to this question is that any expenses borne by your company in relation to Research and Development (R&D) projects will qualify for tax relief.
However, there is a distinction to be made between two different types of R&D relief which can be claimed for large and small companies.
Claims under the large companies (RDEC) scheme gain relief at an effective rate of 10.53%, while those under the small companies (SME) scheme gain relief at an effective rate of 24.7% – i.e. the SME scheme is more than twice as beneficial as the RDEC scheme.
If a project is deemed to be subsidized, it will only gain relief under the RDEC scheme, rather than the SME scheme.
There are two key cases which help us to determine whether a project is caught by these subsidy rules. These are First Tier Tribunal cases, and do not create binding precedents, but are helpful for our understanding.
Hadee Engineering Co Ltd v HMRC (2020)
Hadee Engineering Co is an engineering company, and was claiming relief on a range of different projects. They were fully reimbursed by their customers for the hours spent on design and production expenditure. There was also a clear link between the payments they received from their customers and the expenditure being claimed as qualifying expenditure. Two consequences followed from this.
Firstly, the expenses being reimbursed by their customers do not qualify as expenses for the purposes of calculating the allowable expenditure. This reduces the proportion of expenditure which either the SME or the RDEC scheme could apply to.
Secondly, this would fall within the subsidization rules, such that any other expenditure incurred by Hadee Engineering Co on the project would qualify under the RDEC scheme. This would reduce the R&D relief claimed on this from 24.7% to 10.53%.
Quinn (London) Ltd v HMRC (2021)
Quinn (London) Ltd is a construction company, which again was claiming relief on a portfolio of projects. They were completing research and development to produce technologically advanced solutions, bespoke to an individual client’s challenges.
HMRC challenged this claim on the basis that the expenditure was subsidized by the client, however, the First Tier Tribunal ruled that this was not the case. This was because the costs incurred by Quinn were not linked to the payments, and the economic risk was borne by Quinn.
The outcome is that the expenses were eligible for full relief under the SME scheme.
The First Tier Tribunal appears to believe that HMRC are taking a broader stance on the application of the subsidy rules than the legislation allows. The legislation is designed to ensure that where clients do not bear the economic risk or costs of a project that they do not gain enhanced tax relief.
Where a customer reimburses a company for their time costs in connection with research and development on a given project, it is unlikely that the project would qualify for the SME scheme.
Where research and development expenditure is simply incurred as part of a project where the customer is paying for the output, it would appear on the basis of the available case law that the SME scheme would apply.
This decision confirms that a broader scope applies to R&D claims than that which HMRC previously accepted. If you feel that your projects may fall within the bounds of this enhanced scope, please contact us.