Hadee v HMRC: Key Takeaways for Research & Development Tax Relief Claimants
If ever there was a lawsuit that highlights the importance of dotting the i’s and crossing the t’s when it comes to research and development tax relief claims, it’s Hadee Engineering Co Limited v HMRC.
This 2020 First-tier tribunal case centred on two amended tax returns submitted to HMRC by an engineering company under the R&D Tax Credits SME scheme. The lengthy enquiry into the company’s R&D claims, and subsequent tribunal action, have raised some valuable points of note for anyone wanting to apply for tax relief as an SME.
Key lessons for research and development tax claimants
Above all, this landmark decision serves as a useful reminder to all claimants (but SMEs in particular) to pay careful attention to ensuring your projects meet the required criteria for receiving research and development tax relief. As the appellants in this action discovered, failing to drill down into the detail of the legal definitions, and keep good records, can have significant consequences. Here are the key areas to pay attention to if you want to avoid similar problems with your R&D tax claim.
1. Project plans
Simply calling something a project doesn’t necessarily mean it will be defined as one under the law. In fact, only one of the activities in question in Hadee vs HMRC actually met the required criteria. However, the important point of note is that the tribunal ruled that a ‘project’ must involve the creation of a plan and be supported by documentation.
Key takeaway: Plan out your projects in detail and keep very clear records.
The word ‘project’ is not specifically defined within the BEIS guidelines, so your definition of what that means might differ from that of HMRC. As it is so open to interpretation by the courts, we recommend that a sensible course of action for any business claiming R&D relief is to keep full documentary evidence of any projects you wish to claim for.
It is particularly important that these include detailed explanations of the scientific and technological elements of your plans, and supporting information.
2. Rules on SMEs and subcontracting
In the Hadee case, the appellants were claiming for research and development relief under the SME scheme. However, under HMRC rules, the R&D expenditure in question cannot be incurred if you are an SME acting as a subcontractor – and HMRC take a very broad view of what constitutes subcontracting. The lack of clarity on the contractual working relationship Hadee had with their customer worked against them in their tribunal case.
Key takeaway: Pay attention to the small print when working with a third party.
Again, the definitions here aren’t very clear cut, so it pays to be very careful and specific in how you define your relationship in your contract when undertaking work for a third party as an SME.
In determining whether the work has been carried out as a subcontractor, the ownership of any intellectual property relating to the research and development, the level of autonomy of the party in question and where the economic risk lies are all taken into consideration. So, bear these things in mind when agreeing on terms.
3. Subsidised work
Expenditure that is subsidised is not eligible for R&D relief. This proved to be the case with Hadee as costs had been covered by their customer. Direct payments clearly fall within this rule but it’s worth being cautious regarding indirect payments as, again, the interpretation of subsidised is fairly broad.
Key takeaway: Be specific about who has covered any R&D expenditure.
When it comes to costs, you need to have absolute clarity on who is paying for what. Keep detailed financial records and ensure you clearly separate out any R&D costs. This can be a tricky area of tax relief to navigate, so it’s worth consulting a professional for expert advice.
Helping you avoid costly R&D errors
Cases like these are useful learning opportunities for both claimants and tax advisors. In gaining more insight into how HMRC interpret the R&D guidelines in processing claims, we can all work smarter.
If you’re an SME looking for advice on research and development tax relief, we are here to help. Our multi skilled team includes business and strategy consultants, chartered accountants, compliance experts, and an ex-HMRC inspector.
For a friendly chat with our experts, just give us a call on 028 9140 4030.