We now have a clearer picture, although there’s still some way to go and one notable omission.
HMRC have published their revised guidance on the interpretation of ‘subcontracted’ and ‘subsidised’ R&D.
These are two areas that have been hotly debated over the last few years, with HMRC taking a very restrictive view on the circumstances under which an SME is entitled to the relief. The two First-tier Tribunal cases – Collins Construction Ltd [2024] UKFTT 951 (TC) and Stage One Creative Services Ltd [2024] UKFTT 1059 (TC) – that were decided last year resoundingly rejected HMRC’s interpretation, preferring a much more favourable one for SMEs. There has subsequently been a great deal of speculation (including in my article ‘HMRC’s defeats on subsidised and contracted out R&D’, Tax Journal, 8 January 2025) as to how HMRC might react, and what the decisions would mean for the many companies who have been in dispute with HMRC on these points.
Now, with the revised guidance, the picture is clearer, though there is still a long way to go.
On subsidy (see Corporate Intangibles Research and Development Manual at CIRD81650), HMRC has accepted the position that the ‘otherwise met’ clause is only triggered where the subsidised company ‘provides nothing in return or provides something which does not represent a commercial return’. This is very much aligned with the two decisions, as well as that given in Quinn [2021] UKFTT 437 (TC), several years ago. It is still quite vague as to the circumstances in which that clause will apply, which I suspect is because HMRC are struggling to identify a situation in which it would. Nevertheless, it is a positive move that the new guidance is in line with what we have always considered to be the correct interpretation.
On the subcontracting point (see CIRD84250), there are some positives and negatives.
On the one hand, there is a significant and welcome shift away from the previous (incorrect) view that: ‘Any activities carried out in order to fulfil the terms of a contract are considered to have been contracted to the company’. The new guidance gives a series of ‘factors’ that need to be considered:
whether the R&D is ‘incidental’ to the supply under the contract;
the autonomy of the parties;
the financial risk (although it is acknowledged this is not a very useful indicator); and
the ownership of IP.
The most important of these is the ‘incidental’ question, although it is phrased in a way that still leans towards the (unfavourable) interpretation that R&D has been subcontracted. It introduces a very subjective question, examining not just the contract but the surrounding circumstances, and considering whether the principal ‘required or was aware’ that R&D would be required. This isn’t a view that’s supported by the legislation, nor is it really in line with the conclusions from Collins or Stage One. Rather curiously, it does appear to be an attempt to retrospectively apply the new legislation (which only applies from 2024 onwards) to claims made under the old rules.
There are also three examples given. This seems to be a growing trend with guidance on the R&D schemes, in line with several other recent publications, and it should be a good thing. That said, the examples are all quite simplistic, and most real scenarios are more nuanced and complicated. As such, it remains to be seen how useful the examples will be, since there will almost always be a difference between them and reality. Examples 1 and 3 give a conclusion that is the opposite of what would be expected under HMRC’s previous guidance, further demonstrating a change in HMRC’s position. But example 2 is quite an ambiguous situation and one in which I do not agree with the conclusion; it does not seem in line with the design of the scheme to limit a claim in the way described.
Finally, there is one notable omission. The guidance is silent on what will happen to the many companies who have been victims of HMRC’s incorrect interpretation over several years, either because HMRC have (incorrectly) rejected their claims, or because they have followed the flawed historic guidance. Do HMRC intend to allow any restitution for such companies? This is still unclear. However, if there are companies in this position, I would be interested to hear from them in order to explore the options that may exist.
Home >Articles > New HMRC guidance on subcontracted and subsidised R&D
New HMRC guidance on subcontracted and subsidised R&D
We now have a clearer picture, although there’s still some way to go and one notable omission.
HMRC have published their revised guidance on the interpretation of ‘subcontracted’ and ‘subsidised’ R&D.
These are two areas that have been hotly debated over the last few years, with HMRC taking a very restrictive view on the circumstances under which an SME is entitled to the relief. The two First-tier Tribunal cases – Collins Construction Ltd [2024] UKFTT 951 (TC) and Stage One Creative Services Ltd [2024] UKFTT 1059 (TC) – that were decided last year resoundingly rejected HMRC’s interpretation, preferring a much more favourable one for SMEs. There has subsequently been a great deal of speculation (including in my article ‘HMRC’s defeats on subsidised and contracted out R&D’, Tax Journal, 8 January 2025) as to how HMRC might react, and what the decisions would mean for the many companies who have been in dispute with HMRC on these points.
Now, with the revised guidance, the picture is clearer, though there is still a long way to go.
On subsidy (see Corporate Intangibles Research and Development Manual at CIRD81650), HMRC has accepted the position that the ‘otherwise met’ clause is only triggered where the subsidised company ‘provides nothing in return or provides something which does not represent a commercial return’. This is very much aligned with the two decisions, as well as that given in Quinn [2021] UKFTT 437 (TC), several years ago. It is still quite vague as to the circumstances in which that clause will apply, which I suspect is because HMRC are struggling to identify a situation in which it would. Nevertheless, it is a positive move that the new guidance is in line with what we have always considered to be the correct interpretation.
On the subcontracting point (see CIRD84250), there are some positives and negatives.
On the one hand, there is a significant and welcome shift away from the previous (incorrect) view that: ‘Any activities carried out in order to fulfil the terms of a contract are considered to have been contracted to the company’. The new guidance gives a series of ‘factors’ that need to be considered:
whether the R&D is ‘incidental’ to the supply under the contract;
the autonomy of the parties;
the financial risk (although it is acknowledged this is not a very useful indicator); and
the ownership of IP.
The most important of these is the ‘incidental’ question, although it is phrased in a way that still leans towards the (unfavourable) interpretation that R&D has been subcontracted. It introduces a very subjective question, examining not just the contract but the surrounding circumstances, and considering whether the principal ‘required or was aware’ that R&D would be required. This isn’t a view that’s supported by the legislation, nor is it really in line with the conclusions from Collins or Stage One. Rather curiously, it does appear to be an attempt to retrospectively apply the new legislation (which only applies from 2024 onwards) to claims made under the old rules.
There are also three examples given. This seems to be a growing trend with guidance on the R&D schemes, in line with several other recent publications, and it should be a good thing. That said, the examples are all quite simplistic, and most real scenarios are more nuanced and complicated. As such, it remains to be seen how useful the examples will be, since there will almost always be a difference between them and reality. Examples 1 and 3 give a conclusion that is the opposite of what would be expected under HMRC’s previous guidance, further demonstrating a change in HMRC’s position. But example 2 is quite an ambiguous situation and one in which I do not agree with the conclusion; it does not seem in line with the design of the scheme to limit a claim in the way described.
Finally, there is one notable omission. The guidance is silent on what will happen to the many companies who have been victims of HMRC’s incorrect interpretation over several years, either because HMRC have (incorrectly) rejected their claims, or because they have followed the flawed historic guidance. Do HMRC intend to allow any restitution for such companies? This is still unclear. However, if there are companies in this position, I would be interested to hear from them in order to explore the options that may exist.
