Collins Construction Limited v HMRC
Case number: TC09332
21 October 2024
SOCS is a specialist engineering business that develops solutions in the live events and installations market. The business tends to take on projects where there is no routine method or certainty of delivery. They have a visible value proposition to create novel concepts to agencies.
The main drive of HMRC’s argument in this matter was the concern regarding double claim, where two parties had the same expense subsidised.
The SOCS contracts with their clients focus on the outcome only, rather than the method in which they get there. In addition SOCS retain the IP related to the projects they are engaged in. Their projects are quoted on a fixed costs basis and additional costs do not get passed on to the client. SOCS remain liable for non-delivery and risk of projects making a loss.
HMRC indicated a challenge as to whether any R&D had been undertaken at all, as well as questioning if the R&D belonged to an overseas entity.
When the HMRC enquiry was raised in July 2020, there was a focus on 3 projects and whether those projects had been undertaken on behalf of a third party and fulfil a ‘contractual obligation’. HMRC pointed to the Hadee case as precedent. HMRC also challenged the outcome of Quinn.
HMRC maintained the original challenge and whilst no new evidence was forthcoming, looked to move to amend the tax return and remove the R&D tax benefit.
Initially Alternative Dispute Resolution (ADR) was suggested but was found not to be useful. The case was pursued by SOCS with no successful outcome and came to a close in Nov 2021.
HMRC looked to close in December 2021 and relied on CIRD81650 showing the link between the activity and the payment from the third party as well as reiterating their previous points. SOCS appealed two Discovery Assessments and one day later HMRC continued to issue the closure notice on 21 Jan 2022. SOCS submitted Notices of Appeal to the FTT (tax Chamber).
The appeal focused on three projects, The Pearl, The Pavilion and the Parade. The Managing Director of SOCS presented evidence on all projects to demonstrate the uncertainty in their feasibility and the additional financial risk the business was taking on with these projects. He also demonstrated that the margin of the projects did not meet their own business goals and included loss making projects.
Summary issue under point 139 of the judgement “Shortly put, the issue between the parties is whether a company incurring R&D expenditure in meeting its contractual obligations is automatically both sub-contracted and subsidised?”
The courts supported the decision reached in Quinn as well as Perenco (which set the scene for the Quinn approach) and were not persuaded by HMRC’s argument.
The fact the price may change, and the risk had transferred to the business from the third party as long as the focus is on the outcome and the third party does not then taken interest or ownership in the methods or process.
Mr Leigh, the MD, gave a colourful analogy that the client wanted the “picture on the jigsaw box, but has no interest in putting the puzzle together”. The clients did not instruct SOCS as to the order in which the pieces go together and SOCS was not rewarded for the way in which the puzzle is solved. SOCS is simply “rewarded for delivering a completed puzzle that matches the picture on the box”. Mr Leigh’s evidence was very clear to the effect that “…its only often when you are in the belly of the project that you realise the level of technical challenge that you face”. The courts accepted this analogy.
R&D was not in the scope of the contract so not a clear intention to contract out R&D activity.
Contracting out was further confirmed as agreed in Quinn and that variations to the contract should not be assumed to reflect R&D activity and retaining the IP and bearing the financial risk of the project meets the guidance in CIRD84520.
The court would not accept HMRC argument that the legislation encompasses only freestanding R&D.
In this case it looks like HMRC were looking to land something to challenge Quinn and to put the spotlight on the risk of double claiming. In HMRC’s own words, they were on the lookout for areas that they had missed.
We should be encouraged by the FTT’s commercial and pragmatic approach, with a desire to understand the business and being highly respectful of the area of trade of this business.
Case number: TC09332
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