Recently, the Research & Development Consultative Committee (RDCC) highlighted the outcome of an appeal hear by the First-Tier Tax Tribunal concerning an R&D tax claim by Hadee Engineering Co Ltd (Hadee). Hadee made R&D claims for both 2009 and 2010 which HMRC challenged, asking if the expenditure was incurred in the relevant periods, whether the projects qualified as R&D under the BIS guidelines and whether the expenditure was incurred as part of a contract and whether the expenditure had been subsidised. In addition there were questions raised regarding ownership of IP, an issue which is largely no longer relevant due to changes in the law since 2010. Given that the RDCC specifically flagged the case, we suspect that the frontline HMRC inspectors will use this to argue their case and therefore we feel that the consequences are important to note for all R&D companies. 

In terms of sectors, this is likely to be most important to engineering companies, particularly with reference to the questions over subcontracting and subsidies; however, we feel that all R&D businesses should review their claims and make sure they are 100% confident on some of these points.

1. Inadequacies of evidence. In the verdict, there is a comment surrounding the meaning of ‘project’ and the expectation that there is some record or documentary evidence which identifies the uncertainty. Make sure you have the correct documents in shape at the beginning of each new project.

2. Insufficient financial records. It was noted that the company did not have a clear way to demonstrate that some of expenses, which were properly vouched for, were for the purposes of R&D. In future - make sure that you can separate which part of an invoice, for example, may be for R&D costs.

3. R&D carried out as part of a wider contract may constitute subcontacted R&D and thus may not qualify. The tribunal supported the HMRC argument that as the appellant was commissioned to design the product rather than just manufacture and fit the product  the work was subcontracted R&D, and thus did not qualify under the SME scheme.. Check the rules with a professional to make sure where you fit with regards to subcontracted work.

4. Subsidised costs do not qualify. Similarly, many tax advisers have not considered R&D to be subsidised unless it is paid for directly and specifically. However in the verdict there was no attempt to be this narrow in the definition and when looking through the comments on the various projects, it was clear that to the extent that the costs had been covered by the payments from the customer, they were considered to be subsidised and thus feel foul of the subsidy rule. Check the rules with a professional to make sure where you fit with regards to subsidised work.

Finstock Capital works with borrowers to ensure that they get the best claim possible as we review and feedback on each claim prior to submission working alongside ex-HMRC inspectors. Alternatively, if a company has had an enquiry or is in the process of an enquiry then we can still lend against the claim, and have done so successfully in the past to help companies navigate that process and access cash in the meantime.

“ Finstock Capital works with borrowers to ensure that they get the best claim possible as we review and feedback on each claim prior to submission working alongside ex-HMRC inspectors”