R&D tax credits provide valuable support to businesses undertaking cutting edge projects. The main regime for small and medium sized enterprises (SMEs) provides a super-deduction against taxable profits or a cash credit for loss-making businesses.
In the year to March 2020, the value of these claims was £7.4 billion.
Our guide to R&D tax credits has details of how the schemes work.
We say ‘schemes’ because there are in fact two: large companies have the far less generous R&D Expenditure Credits (RDEC). By way of comparison, SME R&D relief provides for a credit equal to 33% of qualifying expenditure whereas for large companies the credit is a more miserly 13% and is itself taxable.
In addition, an SME (as defined in our guide) can be unceremoniously thrown into the large company RDEC scheme if its expenditure is “subsidised”. The legislation does not specify what this means and the point was explored in the recent First-tier Tribunal case of construction firm, Quinn (London) Limited v HMRC (TC/2020/01846).
Quinn was undertaking a project on behalf of a client and claimed R&D relief in respect of the cutting-edge work it had performed as part of the project. It was HMRC’s contention that the commercial arrangement that the company had with its client meant that the expenditure was being indirectly subsidised.
Fortunately, the judge ruled in favour of the client, arguing that by extension this would deny relief in all cases except where the company had no prospect of exploiting the R&D for commercial gain. This hardly seems the intention of the legislation!
So good news: clients can continue to claim valuable R&D tax reliefs for client-funded projects, be it in construction, proptech, fintech or another field of technological innovation.
Even so, the case highlights once more the complexity of the legislation. HMRC have also been known to argue that in such cases, the right to any R&D claim belongs to the end customer on the basis it has subcontracted out the project. Here the exact terms of the contract will be critical in establishing who has the rights to the ensuing tax benefits.
If you’re exploring R&D tax credits, expert advice can help you to avoid the pitfalls, keep to the time limits and achieve a successful outcome with HMRC.
To find out more, please get in touch with your usual BKL contact or use our enquiry form.