Quinn – Taxpayer entitled to claim enhanced research and development relief
In Quinn (London) Ltd v HMRC [2021] UKFTT 0437 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal against HMRC's decision to refuse its claims for enhanced research and development relief (enhanced R&D relief), on the basis that the claimed expenditure was “subsidised” within the meaning of section 1138(1)(c), Corporation Tax Act 2009 (CTA 2009).
Background
Quinn (London) Ltd (Quinn) was a construction company which carried out projects which generated new technological knowledge and capability which it then exploited in future commercial work. Quinn claimed enhanced R&D relief under Chapter 2, Part 13, CTA 2009 (the SME scheme).
During the relevant periods, Quinn carried on a trade of providing construction and refurbishment works to a range of clients (the Clients) in return for an agreed price. HMRC accepted that, during the relevant periods, Quinn was a small or medium sized enterprise (SME) and that, in the course of its trade as carried on in those periods, it carried out in-house direct research and development (R&D) and expended sums on the R&D which it was entitled to deduct in computing its taxable profits for corporation tax purposes (the claimed expenditure). HMRC contended that Quinn was not entitled to the enhanced R&D relief it had claimed in respect of the claimed expenditure, on the basis the claimed expenditure was “subsidised” within the meaning of section 1138(1)(c), CTA 2009.
HMRC refused Quinn's claims for enhanced R&D relief and amended its tax returns for the relevant periods on closing its enquiries into those returns. Quinn appealed to the FTT.
FTT decision
The appeal was allowed.
Whether the claimed expenditure fell within section 1138(1)(c) was the only issue before the FTT.
Section 1138(1)(c) provides that a company's expenditure is treated as subsidised to the extent that it is met directly or indirectly by a person other than the company. HMRC argued that it is sufficient for section 1138(1)(c) to apply that the relevant R&D was carried out by Quinn in the course of it providing construction and refurbishment services to the Clients for which it was entitled to payment from the Clients of a sufficient amount to cover the claimed expenditure, which was in due course paid. In HMRC's view, it followed that the Clients indirectly “met” the claimed expenditure by paying Quinn for its services.
Quinn argued that, on the contrary, it could not be said that the claimed expenditure was “met” by the Clients who, under an entirely commercial arrangement, simply paid a price for a product, namely, the finished building works.
The FTT decided that, on the natural interpretation of the relevant provisions as viewed in the overall context of the SME scheme, section 1138(1)(c) was not intended to apply in the circumstances of this case, in the absence of a clear link between the price paid by the client/customer and the expenditure on R&D. The FTT commented that it would be "wholly out of kilter" with the overall SME scheme if an SME were to be denied enhanced R&D relief solely because, in doing what is envisaged by the legislation, namely, utilising the relevant R&D for the purposes of its trade (as is usual and to be expected of an entity carrying out a trade on a commercial basis), it seeks to recover some or all of the relevant costs of the R&D under its commercial contracts with its clients. The FTT stated that if HMRC’s approach were to be adopted, the circumstances in which a SME could claim enhanced R&D relief would be confined to those where it has no prospect of exploiting the R&D for commercial gain.
The FTT also considered an application made by Quinn (which was opposed by HMRC) for the case to be allocated to the Complex category (with the consequence that the special costs regime for Complex cases would apply). Applying the decision of the Upper Tribunal (UT) in Capital Air Services Ltd v HMRC [2010] UKUT 373 (TCC), the FTT granted Quinn's application, stating that the appeal involved a “complex or important principle or issue” for the purposes of rule 23(4)(b) of the First-tier Tribunal (Tax Chamber) Procedure Rules.
Comment
As the FTT noted in its decision, this case involved an issue on which there was no binding authority. The determination of this issue and the scope of the SME scheme, is likely to affect many other taxpayers who find themselves in a similar position to Quinn. The decision may assist taxpayers in resisting attempts by HMRC to narrow the scope of enhanced R&D relief on the basis of the application of section 1138(1)(c) although, as a decision of the FTT, it is not binding on future FTT panels. Given the significance of the issue, it is likely HMRC will seek to appeal the decision to the UT.
The decision can be viewed here.