HMRC’s renewed focus on Engineering, Software and Construction firms claiming R&D Tax Relief
As the start of a new tax year begins, we turn our focus to R&D tax relief claims and the latest changes that businesses who are claiming or considering claiming should be aware of.
To provide expert advice in the application of R&D Tax Relief, professional advisers need not only accounting expertise, but also knowledge and expertise in the sciences and technologies that our innovative clients are advancing.
Kirk Newsholme partner with internationally renowned Innovation Funding Specialists, ABGI who’s PHD experts can optimise our clients’ R&D Tax Relief claims, enabling a smooth and simplified approach to the process of claiming.
Whilst many of our readers will have applied for R&D Tax Relief for many years and have a good understanding of the scheme, Russell McGrath, Innovation Funding Specialist at ABGI, warns that recent developments in R&D tax legislation mean that extra caution is needed:
“Within the last 12 months, HMRC has updated its guidance on how R&D Tax Relief legislation should be interpreted. These changes are having significant impact on many businesses claiming R&D Tax Relief. This is particularly true for businesses in Engineering, Software, and Construction sectors. We are also seeing a very large increase in the number of enquiries being launched by HMRC.
This is of particular concern for Engineering, Software, and Construction companies who often carry out work, including innovative work, which is paid for by another business. Recent changes mean that many firms in this type of relationship will have their future claims greatly reduced in value. At the same time other firms will see their claims greatly increase in value.”
At Kirk Newsholme we encourage all our clients – but particularly those operating in these sectors – to contact us to seek an understanding of the recent changes to the R&D tax scheme, and have a conversation to ensure they apply the legislation correctly going forward, and maximise their legitimate claim value.
How contracted out R&D and subsidised R&D are viewed by HMRC.
- Two recent cases in law have given rise to what appears to be significant changes in how HMRC interpret the legislation which governs R&D Tax Relief. The cases concerned situations where a business had carried out R&D activity as a part of a project to provide a product or service to a separate business.
- These cases and subsequent conversations, as well as clarifications with HMRC case officers, highlight that, when such relationships exist, identifying which parties have legitimate claims for R&D Tax Relief and what the value of those claims should be is extremely complex.
- It is also clear that HMRC are focussing on this area in their current efforts to identify and reject spurious claims.
- These developments are of major importance to companies whose primary mode of business involves doing work to provide specific products or services to a separate business. Businesses in sectors such as engineering, software development and construction should consider taking advice around these issues.
Hadee Engineering Co Ltd vs HMRC
In Hadee Engineering Co Ltd vs HMRC in 2020, the First Tier Tribunal considered whether projects were subcontracted to Hadee. Work subcontracted to a firm cannot be included in a claim under the SME scheme. Many of the projects saw the Hadee reimbursed to some extent for the activities and it was ruled that the activities therefore failed the SME criteria requiring that the work done should not be either subsidised or contracted to the company by another person.
The Hadee First Tier Tribunal ruling highlighted that legislation states “expenditure on activity required to fulfil a contract with another person is excluded from the SME scheme”, to emphasise that even when a contract does not stipulate that R&D will take place HMRC will still view the R&D as having been paid for by the commissioning company.
This view has been supported and emphasised in all conversations which have taken place between ABGI and HMRC since the tribunal result.
Quinn (London) Ltd vs HMRC
In Quinn (London) Ltd vs HMRC in 2021 the First Tier Tribunal wholly considered the definition and conditions to be met for a claim to be subsidised.
Quinn’s trade is to provide construction and refurbishment works to a range of clients in return for an agreed price. Whilst providing construction and refurbishment works for its clients, Quinn developed several novel techniques for refurbishment of properties.
Legislations states that subsidised expenditure has taken place: “To the extent that it is otherwise met directly or indirectly by a person other than the company.”
HMRC claimed that the client indirectly met the R&D expenditure by paying Quinn for the delivery of the contract. Quinn argued that the expenditure was in fact met by Quinn, then used to generate profits under a subsequent contract with client.
The judge ruled in favour of Quinn, stating that the activity was not subsidised and allowed the claim to stand.
The cases serve to emphasise to businesses in these kinds of relationships, that they must make a coherent argument as to why the expenditure they are claiming for does not fall under the definition of work being contracted out or subsidised.
Kirk Newsholme, with the help of our partners at ABGI, are here to provide expert guidance in making those arguments when compiling the R&D tax claim, to ensure our clients do not have to go through the inconvenience of a protracted enquiry from HMRC.
For more information or to discuss R&D claims in more detail, please contact Justin Smith on 0113 2044228 or email justin.smith@kirknewsholme.co.uk
