HMRC Will Not Appeal Tribunal Decision in Favour of SMEs

HMRC has recently lost two cases against SMEs they claimed were not entitled to research and development (R&D) Tax Credits on the basis of their R&D work being subsidised by the SMEs’ clients. It was decided that the R&D was undertaken by the SMEs outside of the direction and without the financial support of their clients.

In both cases, a tribunal decided in favour of the taxpayer. In the case of Collins Construction Ltd v HMRC in the First-tier Tribunal Tax Chamber, the decision was published on 21^st October 2024. In the case of Stage One Creative Services Ltd v HMRC, the decision was published on 25^th November 2024.

Following these decisions, detailed further below, many SMEs have been awaiting further clarification on the effect on other ongoing compliance checks.

Other SMEs have had their claims rejected or queried on similar grounds as Collins Construction and Stage One Creative Services and pushed HMRC to make their stance on such claims clear.

On 17^th December 2024, HMRC sent out an email to members of the R&D tax advisory community confirming that they will not appeal the decisions made at the tribunals.

HMRC is “considering the wider impacts these decisions have” and will publish further guidance in February 2025. They will also reach out to those with ongoing compliance checks in January 2025 to advise on next steps.

Decisions at First-tier Tax Tribunal

Collins Construction is an SME established in 1956, delivering refurbishments and fit-outs for a range of clients. Once projects were won by tender, Collins encountered R&D challenges in the course of delivering the projects, which were outside of the agreed scope of the work.

Stage One Creative Services provides engineering construction and automation solutions for live events and installations. For example, they designed, built and installed a complex scenic design for a theatre show with an automated pearl which was flown through the theatre before opening to reveal a performer.

HMRC refused the claims made by the company under the SME R&D Tax Credit scheme on the basis of the work done by the company being subsidised. It argued that the company’s clients subcontracted the R&D and thus the R&D completed by the SMEs was ineligible for tax relief.

However, the tribunal found against this argument, putting forward that “clients do not agree to pay or reimburse the appellants for particular costs… [and the company] did not agree to carry out the relevant R&D on being paid or reimbursed by the client for doing so.” This quote comes from the decision in Collins v HMRC.

Tribunal Judge Sukul’s decision supported the decision in an earlier First-tier Tribunal (Quinn (London) Ltd v HMRC). This decision itself was also supported by an Upper Tribunal decision in HMRC v Perenco UK Ltd.

In Quinn, a similar situation was put forth and a tribunal found in favour of the taxpayer. It found that if HMRC’s position were to be accepted, there would be little incentive for any SME who seeks to exploit its R&D for commercial gain to put forward a claim.

This is a welcome decision for the many SMEs navigating the minefield of claiming for R&D work they take on of their own volition, within the undertaking of a project for a client where “there is no contractual requirement or provision for R&D activities”.

Unfortunately, this decision could only be made as Collins and Stage One had the resources to pursue their claims to the First-Tier Tax Tribunal.

Many SMEs are subjected to costly defences which can take months, or even years, to reach an outcome. The cost of defending their position may well be more than the claim’s value, which dissuades claimants from pursuing their claim to this point.

However, HMRC’s acceptance of the decisions and promise to provide further guidance offers these SMEs some hope for these claims being eventually accepted.

How Myriad Can Help You

At Myriad, we're not just another tax incentives consultancy; we deliver high-quality services while eliminating your risk.

Our promise to you is simple: we stand firmly behind our advice. If a claim submitted by us is challenged, we'll defend it free of charge. If your claim is rejected, we won't charge you any fees. We'll cover any HMRC penalties and even compensate you for your time.

By leveraging our expertise, you can focus on what you do best – innovating and growing your business – while we ensure you receive the maximum R&D tax relief you're entitled to. We have experience at all levels of legal disputes with HMRC over R&D tax relief, from the first response following a letter through the letterbox to delivering ground-breaking decisions at First-Tier Tax Tribunal.

For a discussion about your R&D tax credit opportunities or a compliance check you’ve received, please call 0207 118 6045 or reach out through our Contact Page.