After much anticipation, we are finally approaching the point where the merged R&D Expenditure Credit (RDEC) scheme will become the standard framework.
Significant work has gone into refining aspects of the regime that have historically been problematic for businesses, particularly in relation to contracting out and the subsidised expenditure rules. Combined with insights gained from the surge in HMRC enquiries and recent FTT decisions on R&D tax cases, the question now is: are we headed for calmer or choppier waters?
The importance of a competent professional
The merged RDEC scheme retains the core intent and purpose of previous regimes, including the essential criteria used for assessment. Notably, these criteria remain broad and open to interpretation, reaffirming the critical importance of the competent professional in any claim.
Cases like Hadee and Flametree illustrate what falls short of this standard. These principles appear to have enduring relevance and are unlikely to shift significantly under the new merged regime.
On the flip side, Tribunal rulings, including those in Quinn (London), Get Onboard, AHK Recruitment, Flametree Publishing and more recently Stage One Creative have underscored the weight placed on the judgment of the competent professional. Get Onboard is especially instructive—it not only reinforced the value of such as illustrated in gfc3 guidance which has an entire section on ‘The importance of a competent professional (part 3)’
When is R&D intended or contemplated by potential claimants?
When considering the potential contentious issues arising from S1133 CTA09 on Contracted out R&D, it is helpful to look at not only what Parliament intended, which was to prioritise the enterprise which decided to carry out R&D in allowing tax relief on the same for the company and avoid double dipping of tax relief, but also some principles from past tribunal hearingsThe Tribunals in Stage One Creative, Quinn, and Collins Construction focused heavily on where financial risk sat, examining whether projects were commercially viable or loss-making, alongside the contractual substance of the relationships involved. Similar substance over legal form assessments will be required under the new regime, with a stronger focus on predictive R&D along with the evidence to back this position increasing the burden of proof for companies to justify an R&D project as its own.
The language now embedded in the new legilsation—phrases such as “intended or contemplated”—echoes the practical considerations discussed in these cases. It’s reasonable to expect that the precedents set by these judgments will continue to inform how future cases are assessed.
One area ripe for further reflection is the potential unintended consequences following the removal of the old subsidy rules, particularly if the provider of the subsidy is eligible to claim R&D tax relief. Reviewing the nature of the contract between the subsidised entity and its sponsor will be key as it can be argued the provision of such a subsidy was in fact contemplating that R&D was needed therefore the subsidy is in fact a contract for R&D to be carried out? State aid providers will likely be ineligible entities to claim R&D. HMRC had long warned of the risk of “double-dipping” on the same project. With those rules now retired, questions may resurface around how subsidy is interpreted, particularly in light of earlier Tribunal decisions. Will we now look to fallback positions such as the Quinn (London), Perenco, Collins Construction and Stage One Creative cases for guidance without any clear precedent being set?
Complex, but navigable
The government’s commitment to retaining the R&D tax relief framework is clear, and while some future refinements are possible, another major overhaul appears unlikely. The merged RDEC scheme does offer greater certainty, but the reality is that R&D tax relief remains inherently complex and nuanced.
As we’ve seen in cases like Tills Plus and Gripple, project structures, payment flows, and the unavoidable subjectivity in interpreting R&D legilsaiton and guidance will continue to shape claim outcomes. The intention of parliament is always a paramount consideration when clarity on the legal position is lacking. In any event, the claimant company will always need to be made aware of such a scenario and if HMRC guidance is to be disagreed with all the necessary steps to make this position clear to the relevant stakeholders will need to be made. HMRC is expected to maintain a strong focus on reducing fraud and error while supporting businesses that innovate.
How we can help
At InnoFund, we help clients navigate the complexities of R&D Tax with confidence — our Senior Partner, Simba Mareverwa, has defended the most HMRC enquiries into R&D Tax claims in the UK and was fundamental in the creation of SecuRD®(links to https://innofund.uk/securd/ ), which we believe is the one of the safest way to claim R&D Tax in the UK, book a call to speak to us here (links to calendly booking https://calendly.com/fundyourinnovation/exploratory )
