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R&D: Shifting views on subsidy and contracting


HMRC has changed its R&D guidance to include more restrictive interpretations of the subsidised expenditure and contracted out activity rules for SMEs.

12th Jan 2022
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This issue revolves around the conditions for qualifying expenditure expressed in s1052(5) CTA 2009. To qualify as in-house direct R&D, the expenditure must not be incurred by the company in question on activities which are contracted out to the company.

If the R&D activity has been contracted out to the company by someone else then the company cannot include expenditure on that activity in its SME R&D claim. The difficulty, however, is around what exactly is meant by ‘contracted out’, as there is no definition of the term in the legislation.

For me the term ‘contracted out’, as used in the legislation, is a proactive term. The R&D activity is contracted ‘out’ rather than ‘in’, so it is something actively undertaken by the principal.

In order for A to ‘contract out’ an activity to B, I believe it must inevitably be necessary for A to know and intend such a thing to happen. In my experience (and I am not alone here) this has always been the position adopted by HMRC in the past.

New approach

Now we are told by HMRC that if company B has to undertake an R&D project in order to fulfil the terms of its contract with company A, and it was clear to the competent professionals employed by company B that R&D would be needed in order to do so, those activities have been contracted to it.

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Replies (2)

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By Simon@CoodenConsulting
17th Jan 2022 14:08

Hi David,

Great article. The rest of Hadee was a slam dunk for HMRC, do you think that the "subsidised expenditure" element was thrown in to the mix to create some case law "on the cheap" because there was going to be no strong defence for the rest of the claim?



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Replying to Simon@CoodenConsulting:
By David O'Keeffe
22nd Feb 2022 11:26

Hi Simon,

I guess that's a possibility. In a way, I don't really think we can object to HMRC trying to run with multiple arguments (as long as they really think they are reasonable arguments), my problem with Hadee is that (in my opinion, of course) the Tribunal Judge really didn't present a great (or even particularly coherent) analysis of the decision. It's this, I think, that has allowed HMRC to make more of the contracting/subsidy arguments than they merit (again, in my opinion).

Unfortunately, the appellant in Hadee appears to have presented such a poorly evidenced claim and subsequent appeal that it is hard to see how they could ever win.


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