A claim for R&D tax relief under the Small and Medium Sized Enterprise (SME) scheme cannot be made for subsidised expenditure. It may be possible to make a claim under the less generous Research and Development Expenditure Credit (RDEC) scheme. There is a significant difference in the benefit between the two schemes, with the SME scheme being worth up to 33%*, and the RDEC up to 11%**, of qualifying expenditure.
If a project receives any funding which is notified State Aid then no expenditure on that project will qualify for SME R&D tax relief. If a project receives a grant that is not State Aid then the expenditure is subsidised to the extent that it is covered by the grant. Expenditure will also be subsidised to the extent that it is met directly, or indirectly, by a person other than the company.
HMRC’s View
HMRC have been taking a very strict interpretation of the guidelines on subsidised expenditure, especially in relation to customer funded R&D.
HMRC’s R&D manual highlights their view that any payment received under a contract will meet the expenditure incurred in relation to undertaking that contract.
This view means only R&D carried out prior to identifying a commercial use or potential customer would be eligible for SME R&D tax relief. This would prevent the majority of companies being able to claim under the SME scheme.
Recent Case
In the recent Quinn (London) Limited case the company appealed against HMRC’s decision to deny their claims to SME R&D tax relief.
Quinn carried out construction and refurbishment services and HMRC argued their clients met any R&D expenditure as part of payment for the contract, and so the expenditure was subsidised.
Quinn agreed a price, and a schedule of the work to be completed, prior to the start of the contract. The price agreed was not a reimbursement for particular costs, it was for the finished works. If the price quoted was later found to be insufficient to cover the costs of carrying out the project Quinn were unable to increase the contract price.
Quinn were able to utilise any technological advances made during a contract in future projects. Indeed clients would often not be aware of the technical challenges,or the solutions Quinn came up with, as they were only interested in the finished product.
The Tribunal found in favour of Quinn, stating that under HMRC’s interpretation, ‘’expenditure would never be anything but subsidised or ‘’met’’, save for as regards loss-making companies’’. The judge also went on to confirm ‘’that there must be a clear link between the funding and the use of funds for the payment or discharge of the relevant R&D costs’’.
This is a welcome outcome, and provides clarity on what is considered to be subsidised expenditure. If a company invoices for a finished product, and the price is fixed, regardless of the costs incurred, then a claim under the SME scheme may potenially be possible.
However, it is important to note as this was a First Tier Tribunal the decision may be appealed by HMRC.
If you have previously made an R&D claim under the RDEC scheme due to subsidised expenditure contact us on 028 9040 6295 to discuss if you may be eligible to claim under the SME scheme.
*Dependant on the relevant tax position of the claimant Company
** 13% taxable above the line credit