In Strictly Money Ltd v HMRC [2024] TC09296, SME R&D relief for subcontractor expenditure was denied because the expenditure was not wholly and exclusively incurred for the company’s trade.
- Strictly Money Ltd, a company with a technology-based entrepreneurial business, claimed an additional deduction under SME R&D relief, for expenditure on Contracted-out R&D.
- Due to significant losses, the company also claimed an R&D tax credit at 14.5% of the surrenderable loss.
- HMRC issued an assessment disallowing both the additional deduction and the SME R&D tax credit, stating that:
- The company Appealed to the First Tier Tribunal (FTT).
The FTT found that:
- The company's main business activity did not constitute carrying on a trade.
- The business was at a very early stage, focused on getting a technology-based entrepreneurial idea off the ground and was far from commercial viability.
- The company’s consulting work, although a 'sideline' to its main activity, did qualify as trading.
- No relief was available for the subcontractor expenditure because the subcontractor had not performed any 'meaningful' work for the company during the relevant period.
- Expenses must be wholly and exclusively for a trade (per s.54), and this expenditure, when viewed realistically, did not serve any business purpose.
- The remaining expenditure, although incurred for the company's main business activity, did not relate to the sideline consulting work (which was considered trading). As a result, it was not allowable as a deduction from the company's trading profits.
The FTT dismissed the appeal.
Editor's Note
For accounting periods beginning on or after 1 April 2024, significant changes have been introduced to the rules for claiming relief on contracted-out R&D. Under the new definition of 'contracted out', the entity entitled to claim relief is the one responsible for making the key decisions about the R&D. See R&D: Contracting out R&D & Externally Provided Workers (EPW).
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