“ A Tribunal has found against HMRC in a groundbreaking decision which could bring an end to years of disagreement over the treatment of SMEs claiming under the Government’s R&D Tax Credit regime”.

Eve Hopley, CTA, Technical Director of Fiscale, a Suffolk-based R&D Tax Credit advisor, was speaking after the publication on 21st October 2024 of the decision in the First-tier Tribunal (Tax Chamber) between its client Collins Construction Ltd and HMRC.

The Tribunal found against HMRC who refused two of the company’s SME R&D Tax Credit claims on the grounds that the R&D was both subsidised and sub-contracted, in contravention of the legislation.  Originally, HMRC had also challenged the existence of eligible R&D activity, but this was approved through the normal enquiry process.

Eve Hopley added: “This Tribunal result confirms that HMRC’s interpretation of the legislation was incorrect and we welcome this decision. Like many advisors, Fiscale felt HMRC had altered its interpretation on subsidised and sub-contracted R&D  compared to its position in previous years, and this recent approach has subjected SME businesses to lengthy and costly defences. Many gave up because the cost of defending could dwarf the value of the claim to the business. Only the companies with sufficient reserves could afford to take HMRC on. That was unfair.”

Adam Spriggs CTA, technical lead at Fiscale with responsibility for representing this and other contested claims through HMRC enquiries, ADRs and FTTs, said “the recent treatment of SMEs by HMRC has caused enormous stress to our clients and thousands of other SMEs who have had significant Corporation Tax refunds and credits held up or rejected.The clients we have been representing to challenge HMRC’s interpretation, have more than £10 million at stake; the total figure impacted nationally would be huge. Fiscale has worked on achieving this result for over three years, working closely with Edward Hellier, barrister at 11 New Square Chambers.”.

In her decision, Tribunal Judge Sukul supported the outcome of an earlier First-tier Tribunal (Quinn (London) Ltd v HMRC) on the matter of subsidised R&D, that HMRC did not appeal, and further commented on sub-contracted R&D “Objectively assessing the meaning which a reasonable legislature would be seeking to convey in using the words “contracted out” and “contracted out R&D”, we do not consider the broad interpretation suggested by HMRC to be appropriate.”

Collins went to First-tier Tribunal as one of  two lead cases who had been refused R&D Tax relief under the SME scheme on both subsidised and sub-contracted grounds. The other case was heard three weeks before Collins and the decision has yet to be released.

John Mayhew, Chair of Fiscale, said “hopefully, this result will re-instate the value of R&D Tax Credits by encouraging and incentivising SMEs to invest in innovation as Parliament originally intended. I urge HMRC to offer redress to potentially thousands of SMEs who since late 2019 have had their R&D claims refused, abandoned on commercial grounds or who have agreed to settle at the lesser benefit through the RDEC process.