In Collins Construction Limited (CCL) v HMRC [2024] TC09332, a company's claim for SME R&D tax relief was upheld by the FTT, who found, contrary to HMRC's allegations, that the relevant expenditure was not subsidised and it was not incurred in relation to activities which were contracted out to it either.
- Collins Construction Ltd (CCL) claimed SME R&D tax relief for qualifying expenditure incurred on construction projects.
- HMRC issued Closure notices, rejecting the claims for R&D relief. The notice for 2018 rejected a claim of £573,056.72 and imposed £471.99 additional tax. The 2019 closure notice denied a claim for £2,670,972.94.
- HMRC contended that relief was unavailable because the expenditure was Subsidised, and the R&D activities were Contracted out to CCL.
- CCL Appealed to the FTT.
The FTT found:
- The expenditure was not subsidised expenditure:
- The contracts were for specified works at an agreed price, not for the reimbursement of specific R&D expenditure.
- The price agreed in the contract may not have been sufficient to cover actual R&D costs incurred.
- The contract did not create a clear link between the amount paid by the client and the R&D expenditure incurred. CCL did not expect to receive payment for their R&D costs. The client did not agree to cover or reimburse the costs.
- CCL was not carrying on activities which were contracted out to it:
- The contractual agreements were for the provision of specified works (e.g., design, construction) in return for an agreed price.
- The contracts did not specifically require or foresee that CCL would undertake R&D activities and did not create an expectation that Collins would be reimbursed for R&D expenditure.
- The R&D activities were incidental to the main contractual obligations and were not considered 'contracted out' work. CCL undertook R&D activities at its own economic risk, with no provision in the contracts for reimbursement of R&D costs.
- CCL retained ownership of the intellectual property generated from the R&D and could use it for future projects.
The FTT allowed the appeal.
Editor's comment
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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