Stage One Creative Services Limited v HMRC
Case number: TC09358
25 October 2024
Quinn (London) Limited (Quinn) made a claim under the SME R&D tax release scheme for 2017 and 2018 which was refused by HMRC based on their view that the R&D was subsidised under s1138(1)(c).
Quinn challenged this decision.
Quinn is a specialist construction and refurbishment company and tended to contract with clients under the industry standard terms based on the JCT Standard Building Contract Without Quantities (2011).
In the course of delivering their contracts, Quinn developed technical knowledge and capability that it intended to use on future projects and remained the property of Quinn.
Mr Wells (Heritage Commercial Manager at Quinn) discussed at length the approach to specifying jobs and providing a costed quote for clients. He further detailed how variations are dealt with. This discussion highlighted a number of risk factors to Quinn when taking on projects which may create a cost to Quinn or a further liability.
The FTT considered construction related case law that put into context the agreements, particularly the delivery and liability to construction businesses when they take on projects.
Quinn submitted that when considering subsidised expenditure under s1138 and the words of ‘subsidy’ ‘state aid’ or ‘grant, they commented that ‘Overall, the wording suggests that a payment for no consideration to meet a particular expense falls within ss 1138 (a) and (b) whereas a payment made to acquire goods or services, is plainly not caught.”
Quinn summarised that as they had not been commissioned to undertake R&D activities, it cannot be deemed that the projects had been subsidised.
HMRC’s position was that the wording should be interpreted in its ordinary meaning, in the context of the statute and relied upon Gripple Ltd v HMRC [2010] STC 2283 and Hadee Engineering Co Limited v HMRC [2020] UKFTT 497 (TC).
Quinn added that the purpose of the payment needed to be considered and the basis of the calculation that was used in arriving at the original agreed price. HMRC did not agree with this and felt it was a commercial deal and Quinn had received sufficient sums from its clients to cover the R&D expenditure.
The judge commented that ‘in the overall context of the SME scheme, it is apparent that s 1138(1)(c) is not intended to apply in circumstances such as those in this case, in the absence of a clear link between the price paid by the client/customer and the expenditure on R&D’.
More than that there must be a clear link to the purpose of the funds and how they are used as well as supporting the commercial thrust at the core of most R&D, ‘Indeed, if HMRC’s approach were to be adopted, the circumstances in which an SME could claim enhanced R&D relief would seem to be confined to those where it has no prospect of exploiting the R&D for commercial gain.’
Whilst HMRC looked to use Gripple the judge found against this argument, on the basis that it would apply an incorrect restriction and was taken out of context. The judge also did not consider Hadee as relevant to this case.
Finally Quinn applied for the case to be considered complex as it involved a ‘complex or important principle or issue’ of which the judge agreed and allowed the classification and allowed the appeal in favour of Quinn”.
This is a tricky case because, unlike others, Quinn didn’t lose money, so it was more challenging to demonstrate financial risk. But we should be encouraged that the FTT will continue to consider the context of the commercial situation and the context in which the R&D arises when deciding what is and isn’t subsided.
Case number: TC09358
Case number: TC09332
Case number: TC09235