Landmark ruling on R&D tax relief for SMEs A Win For Innovation

The recent First-Tier Tribunal (FTT) decision in Collins Construction Ltd vs His Majesty's Revenue and Customs (HMRC), published 21 October 2024 has significant positive implications for UK SMEs, particularly those in the construction and related sectors. For years, there's been much debate and misunderstanding surrounding subsidised research and development (R&D) and contracts under various sections within the Corporation Tax Act (CTA) 2009. This case offers much-needed clarity and strengthens the incentive for SMEs to invest in R&D.

What was the case about?

Collins Construction, a company specialising in bespoke construction projects, often encountered unforeseen technical challenges requiring innovative solutions. While these solutions involved R&D activities, they weren't explicitly outlined in the commercial contract terms.

HMRC argued that:

• Payments received from clients constituted "subsidised expenditure" under Section 1138 because the R&D was incorporated into the overall project cost.
• The R&D activities, though not explicitly stated, were inherently part of the "design and construction" services contracted to Collins, making them "contracted out".

Collins Construction, however, argued that:

• Contractual agreements were for delivering specific construction works, not for reimbursing specific R&D costs.
• R&D was undertaken reactively to address unforeseen problems and provide bespoke solutions at their own risk and cost, not as a pre-agreed service.

The Tribunal's decision

The FTT ultimately ruled in favour of Collins Construction. The key conclusions were:

• Payments received for overall project delivery do not automatically classify R&D expenditure as "subsidised" if there's no direct link between specific R&D costs and client payments. This conclusion builds on the decision in Quinn (London) Ltd v HMRC, where similar construction contracts were judged.
• R&D activities that arise organically from a company's commitment to providing bespoke solutions, even if not initially anticipated in contracts, are not considered "contracted out”.

Why is this important for SMEs?

This decision has several positive implications for SMEs, especially those engaging in bespoke project delivery and who are attempting to resolve technological and/or scientific uncertainties.:

• It clarifies that R&D tax relief is not limited to when design activities are explicitly mentioned in contracts. This means SMEs like Collins, who often need to resolve technological uncertainty to meet client needs, can still claim relief.
• It confirms that companies can claim relief for R&D undertaken reactively to overcome challenges and deliver bespoke solutions, even if not initially planned. This encourages a proactive approach to innovation and problem-solving, a critical factor in today's competitive market.
• This ruling reinforces the incentive for SMEs to invest in R&D. By removing ambiguity and confirming eligibility for tax relief in such scenarios, the UK government strengthens its commitment to promoting innovation and competitiveness within the economy.

The need for expert guidance

The complexities of R&D tax relief legislation can be challenging and difficult to navigate. This case highlights the importance of partnering with a specialist R&D tax credit firm. The Momentum Tax Group years of expertise and their knowledgeable technical consultants can:

• Accurately assess whether your company's activities qualify for R&D tax credits.
• Prepare compliant, accurate and concise technical and financial reports that align with HMRC's guidelines and withstand scrutiny.
• Help you optimise your tax relief entitlement, freeing up valuable resources to further invest in innovation.
• Assist you with developing a process to collate and document your activities to ensure you are claiming correctly.

In conclusion, the Collins Construction Ltd vs HMRC decision is a victory for innovation and a positive signal for UK SMEs. By understanding the implications of this case and seeking expert guidance, SMEs can confidently recoup its expenditure and invest in R&D, knowing they have the support of a tax relief system that encourages their ingenuity when partnering with a firm that understands the legislation and guidance.