Specialist Tax Adviser Aiglon Consulting
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istock_Alfredo Allais

R&D tax relief denied on deferred payments

9th Dec 2016
Specialist Tax Adviser Aiglon Consulting
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David O’Keeffe examines a case where deferred payments for sub-contracted R&D work could not be included in an R&D tax relief claim.

Facts of the case

Gas Recovery and Recycle Ltd (TC05473) sub-contracted R&D activity to an unconnected third party. It incurred expenditure of just over £1.1m on this contract, but by the end of its accounting year: 31 March 2013, it had not paid for that work. The amount due under the contract was eventually paid in three instalments in: February 2015, March 2016 and June 2016.

The company included 65% of the full amount in its R&D claim for the year ended 31 March 2013 (in accordance with CTA 2009 s 1136).

HMRC challenge

HMRC reviewed the R&D claim and rejected the part relating to the sub-contracted work, on the basis that the amount had not actually been paid before the claim was made. HMRC subsequently issued a closure notice, which the company appealed. It is worth noting that the first instalment under the contract was paid in time to have been included in an amended R&D claim but no such claim was made.

Eligible expenditure

Sub-contracted R&D is one of five categories of eligible expenditure that have always had a requirement that payment actually be made, before the cost can be included in a claim. In other words it is not sufficient that expenditure be deductible in that period – for example, because an invoice has been raised or it has been correctly accrued – for it to be included in the R&D claim, it must actually have been paid.

The Tribunal agreed with HMRC that the company did not have eligible expenditure in relation to the sub-contracted R&D because payment had not been made to the sub-contractor in time.

HMRC guidance

The company appeared to be arguing that HMRC’s guidance in the corporate intangibles research and development manual (para CIRD 82100), meant that they could include the expenditure in the claim, which would then be held open until such time as payment was actually made, at which point HMRC could accept the claim.The Tribunal had no difficulty in rejecting this argument.


Although the Tribunal found for HMRC and dismissed the company’s appeal, it actually disagreed with HMRC’s interpretation of the law as to when payment must be made. HMRC’s guidance (CIRD 82100) says that payment must be made before the claim can be made, within the time limit – in other words, the payment must be within two years after the year-end. The Tribunal, however, was quite clear that HMRC’s interpretation was too generous; the strict position being that payment must be made before the relevant year-end.


I don’t have the full background to this case but I’m a little surprised that it ever got this far. The requirement for the payment for costs to have actually been made before being included in a claim was always there and, I thought, well known.

The company in this case appears to have argued as part of its appeal, that HMRC should have kept its tax enquiry open until such time as the payment to the sub-contractor had been made, before then allowing the claim. Essentially, the company wanted to make a ‘contingent’ claim that would be quantified and validated at a later date.

This was part of a claim for payable R&D tax credit, so it had a higher likelihood of being looked at by HMRC, but I wonder what the company and its advisers would have done if it hadn’t been reviewed. Even on their analysis of the legislation, surely they shouldn’t have accepted any payment of tax credit until they had paid the sub-contractor?

New interpretation?

The Tribunal’s much stricter interpretation of the timing requirement for payment to the sub-contractor is possibly a little disconcerting. Although, I’m not sure I agree with this interpretation.

HMRC has confirmed that it does not intend to change its position and will continue to apply its long-standing interpretation that payment can be made up to the claim deadline. Of course, that still means that payment must be made before the expenditure can be included in a valid claim.

This decision could still be appealed but I would be surprised if it was.

Replies (2)

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By stelf
13th Dec 2016 11:24


You write that 'HMRC has confirmed that it does not intend to change its position'. Has HMRC publicly confirmed this and if so, could you point us to that confirmation?

Many thanks

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Replying to stelf:
By David O'Keeffe
15th Dec 2016 09:27

The confirmation was in an email from the technical team at HMRC. I'm not sure at this stage what might happen if the decision is appealed, although the published guidance remains online.

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