On 21st October 2024, the First Tier Tribunal (FTT) delivered a significant victory for small and medium-sized enterprises (SMEs) involved in research and development (R&D). The case, Collins Construction Ltd v HMRC, has implications for businesses claiming R&D tax relief, particularly regarding the definitions of “subsidised expenditure” and “contracted-out” activities.
Case background
Collins Construction Ltd, a specialist in refurbishment and fit-out projects, carried out R&D to overcome unique challenges during the project. The company claimed over £3 million in R&D tax relief for the periods ending 30th June 2018 and 30th June 2019.
HMRC denied the claims, arguing that:
- The expenditures were “subsidised” by clients, making them ineligible.
- The R&D activities were “contracted out” to Collins, disqualifying them from SME R&D relief.
Collins Construction challenged HMRC’s stance, leading to a tribunal ruling that could reshape the interpretation of R&D tax relief for many businesses.
Tribunal findings
The FTT ruled in favour of Collins Construction on both key issues:
1.Subsidised expenditure
The tribunal found no direct link between payments received from clients and the company’s R&D costs. Contracts did not specify reimbursement for R&D activities, meaning Collins bore the economic risk of its innovations.
2.Contracted-out activities
Collins conducted R&D for its own benefit, not on behalf of clients – there was no contractual obligation to perform R&D. The company chose to do so at its own discretion and risk.
This confirms that research and development carried out independently within client projects can still qualify for SME R&D tax relief.
Updated guidance and implications for businesses
Following this ruling, HMRC has issued updated guidance clarifying the definitions of subsidised expenditure and contracted-out R&D. The key takeaways include:
- Clarification on economic risk – If an SME independently undertakes R&D and bears the financial risk, it remains eligible for SME R&D tax relief under certain conditions, even if the work benefits a client.
- Strengthened eligibility criteria – SMEs must demonstrate that they initiated and controlled the R&D, rather than fulfilling a contractual obligation imposed by the client.
- Impact on future claims – HMRC has acknowledged the implications of the ruling and is reviewing its wider approach to assessing R&D tax relief claims and could be more favourable for SMEs seeking relief.
Key points for SMEs
- Review contracts carefully – Ensure that agreements with clients do not explicitly or implicitly classify R&D activities as contracted-out work.
- Maintain detailed R&D records – Document projects thoroughly, emphasising your company’s initiative, risk, and ownership of intellectual property.
- Seek professional advice – Given the complex nature of claiming R&D tax relief, expert guidance can help ensure compliance and maximise claims.
How can PM+M help?
At PM+M, we understand the complexities of R&D tax relief, and our team of experts have the experience and knowledge to simplify the process.
We offer a complimentary R&D consultation, where our experts will:
- Assess your eligibility for an R&D tax relief claim
- Review any previous claims for potential risks or missed opportunities
- Provide tailored advice to refine your claim strategy and record-keeping
Get in touch
Want to know more about how this ruling and the updated HMRC guidance affect your business? Contact us today by emailing enquiries@pmm.co.uk to ensure you’re maximising your R&D tax relief potential.
