Donna Challinor
17 December '21

7 minute read

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How R&D projects are operated by companies varies. In-house teams could be leading the projects autonomously or they may be subcontracted or paid for by external clients. Depending on the arrangement, this can have implications on the R&D benefit available.


This has been a question put to many companies over recent months and the answer hasn’t been straight forward. You may have seen our article HMRC’s Tightening Stance in respect of the Hadee Engineering case. Several challenges were put forward by HMRC throughout the Hadee case, however the one that stood out for us, and many other advisers, was HMRC noting that the taxpayer was paid for the results of the majority of the projects by their clients. This led HMRC to question whether the activities represented the taxpayer’s R&D or the end client’s R&D (subcontracted R&D), or whether the R&D was funded by the end client (subsidised R&D).

The answer to this question would have a significant impact on a company’s R&D claim. If the activities represent the taxpayer’s self-funded R&D, the company could achieve a benefit up to 33% of their qualifying spend under the SME regime. However, if the activities represent the end client’s R&D, or are deemed to be funded by the client, the company would only receive a benefit of c.10% of the qualifying spend.

The case referred to below looks at subsidised R&D. The section of legislation relating to subsidised expenditure (CTA 2009, s1138(1)(c)) simply states that expenditure is subsidised ‘to the extent that it is otherwise met directly or indirectly by a person other than the company’. It is fair to say that many R&D advisers and claimants interpret this legislation to mean any R&D expenditure that is directly reimbursed by a customer would be treated as subsidised. This was not interpreted to include commercial contracts whereby a company is paid for a final product arising as a result of an R&D project. The decision in the Hadee Engineering case evidenced that HMRC’s interpretation of this section of legislation seemed contradictory to that of many R&D advisers.


A recent First -Tier Tribunal decision against HMRC – Quinn (London) Limited (‘Quinn’) – has provided some much-needed clarity in respect of the interpretation of subsidised expenditure. Quinn is a construction company that tenders for large construction projects and only delivers this work once a fixed cost has been agreed. The tender process would typically include a schedule of works, some of which would include qualifying R&D activities; however, the extent of the activities is not known at the tender stage. The schedule of works would include a best estimate of any third party and material costs necessary to fulfil the contract and again, these can increase or decrease throughout the delivery phase and as such a degree of financial risk is borne by Quinn.

As with most companies that deliver large contracts, Quinn would agree interim payments to be made throughout the duration of the contract. These interim payments were aligned to the value of works being delivered and were not directly linked to the expenses incurred. The customer placed no restrictions on the manner in which Quinn used the receipts; the receipts were not ringfenced, and there was no contractual obligation to only use receipts from a client against the work done for that client.

Based on the above arrangements, HMRC determined that all the company’s projects were ‘subsidised’ as they considered that the expenditure relating to the R&D activities were indirectly met by the customer. This resulted in Quinn being denied SME tax relief equating to c. £1m as any subsidised expenditure is not eligible for relief under the SME regime.

The Tribunal Judge, Harriet Morgan, noted that it is plain, that under the contracts, clients do not agree to pay or reimburse Quinn for particular costs, such as the claimed expenditure, and Quinn does not agree to carry out the relevant R&D on being paid or reimbursed by the client for doing so. In other words, the bargain made between the parties is not for Quinn to incur specific costs such as the claimed expenditure in return for the clients agreeing to pay those specific costs.

Additionally, the judge stated that 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 was doing what is envisaged by the legislation (namely, utilising the relevant R&D for the purposes of its trade). Furthermore, she stated that as is usual and to be expected of an entity carrying out a trade on a commercial basis, the SME seeks to recover some or all of the relevant costs of the R&D under its commercial contracts with its clients (which are entered into in the course of its ordinary trading activities). Indeed, 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.

It was noted as part of the Tribunal that each of the projects delivered by Quinn generated new technological knowledge or capability, which Quinn was then able to carry forward and exploit in future commercial work. This knowledge was of no value to Quinn’s clients, who often have no knowledge of the technical solutions that Quinn came up with (or tried to come up with) during work on their site. This situation is so familiar to companies across an array of sectors.

As a result of the findings, the Judge found in favour of the taxpayer, meaning that Quinn retained the benefit of the SME relief. We understand that HMRC are not appealing this decision.

This is a fantastic result for the taxpayer and although this case relates to a client within the construction industry, there are similar commercial contracts, with or without interim payments, being entered into across many sectors. The decision in this case will be pertinent for many trading companies supporting their ability to claim relief under the SME regime, for qualifying R&D expenditure, in the spirit that the legislation intended.


Although the recent decision in the Quinn case has provided clarity relating to subsidised expenditure, all projects should be reviewed based on their specific facts. Any similarities shared with the Quinn case are not sufficient to secure the same viewpoint as there may be other factors that should be considered.

HMRC are increasingly scrutinising claims, and this has led to an increased number of recent tax cases. It is therefore imperative that you liaise with experienced R&D advisers to ensure any risks are carefully considered and sufficient documentation is prepared to support your claims.

We ensure that we remain at the forefront of any changes that are being implemented to the R&D regime and we will issue any pertinent updates in future editions of our quarterly “Incentives Insider” newsletter. You’ll find our most recent edition here.

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