In 2022 the House of Lords Finance Bill Sub-Committee was tasked with looking at the reforms to  R&D tax relief contained in the draft Finance Bill 2022-23. Their report was compiled after hearing evidence from businesses, tax professionals, academics and individuals. Their report, which contained several recommendations, was published in January 2023.

HMRC’s response to this report was published with little fanfare in April 2023.  HMRC’s focus appears to be on reducing error and fraud.  In addition, they are still considering a single R&D tax relief scheme, with draft legislation for a technical consultation expected this summer.

Subsidised Expenditure

Expenditure which has been subsided cannot qualify for SME R&D tax relief and must be claimed under the less generous RDEC scheme.

The Committee were concerned regarding the uncertainty of the definition of subsidised expenditure following the Quinn case. They recommended HMRC should consider how they could resolve this uncertainty. 

HMRC lost the Quinn case, which centered on whether the costs incurred were subsidised by their clients. Following their loss HMRC did not appeal the decision.  As the case was heard in the First Tier Tribunal the ruling is not binding.

Following the Quinn case HMRC confirmed their position had not changed on subsidised expenditure. The HMRC R&D manual states there needs to be ‘a clear and direct link between the payment received and the qualifying expenditure.’ They go on to say, ‘payment received for undertaking a contract will be considered to meet expenditure incurred in undertaking that contract’.

Following HMRC’s strict interpretation of the legislation would mean very few companies could claim under the SME scheme.        

What This Means

HMRC are expected to take further cases on subsidised expenditure in the near future.  In the meantime, they will continue to look closely at claims which may contain subsidised expenditure.

The differing views from HMRC and the judge in the Quinn case can leave companies with conflicting views on their qualifying expenditure.  Any claims made under the SME scheme could be open to challenge from HMRC.

We can review your projects and customer contracts and the implications they may have on your claim.  To discuss how this may affect your R&D claim please contact us on 028 9040 6295 or e-mail rb@pgradvisory.com.