“Part 13 Chapter 1 1039 Overview of Part (1) This Part provides for corporation tax relief for expenditure on research and development. (2) Relief under this Part is in addition to any deduction given under section 87 for the expenditure. (3) Relief under Chapter 2 is available to a company which is a small or medium-sized enterprise, in particular— (a) Chapter 2 provides for relief where the cost of in-house direct research and development or contracted out research and development is incurred by the company. … (7) Chapter 2 also provides for the payment of tax credits (“R&D tax credits”) where a company which is a small or medium-sized enterprise— (a) obtains relief under Chapter 2, and (b) makes, or is treated as making, a trading loss. … Part 13 Chapter 2 Relief for SMEs: Cost of R&D incurred by SME 1043 Overview of Chapter (1) This Chapter provides for relief for companies which are small or medium-sized enterprises for expenditure on— (a) in-house direct research and development, or (b) contracted out research and development, where the cost of the research and development is incurred by the company. (2) The reliefs available are— (a) an additional deduction under section 1044, or (b) a deemed trading loss under section 1045. (3) Sections 1046 to 1053 contain provision relevant to the reliefs available under this Chapter, namely— … (f) provision about when a company's expenditure is “qualifying Chapter 2 expenditure” for those purposes (see sections 1051 to 1053). … 1044 Additional deduction in calculating profits of trade (1) A company is entitled to corporation tax relief for an accounting period if it meets each of conditions A to D. … (5) Condition D is that the company has qualifying Chapter 2 expenditure which is allowable as a deduction in calculating for corporation tax purposes the profits of the trade for the period. … (10) For the meaning of “qualifying Chapter 2 expenditure” see section 1051. … 1051 Qualifying Chapter 2 expenditure For the purposes of this Part a company's “qualifying Chapter 2 expenditure” means— (a) its qualifying expenditure on in-house direct research and development (see section 1052), and (b) its qualifying expenditure on contracted out research and development (see section 1053). 1052 Qualifying expenditure on in-house direct R&D (1) A company's “qualifying expenditure on in-house direct research and development” means expenditure incurred by it in relation to which each of conditions A, B, D and E is met. (2) Condition A is that the expenditure is— (a) incurred on staffing costs (see section 1123), (b) incurred on software or consumable items (see section 1125), (c) qualifying expenditure on externally provided workers (see section 1127), or (d) incurred on relevant payments to the subjects of a clinical trial (see section 1140). (3) Condition B is that the expenditure is attributable to relevant research and development undertaken by the company itself. … (5) Condition D is that the expenditure is not incurred by the company in carrying on activities which are contracted out to the company by any person. (6) Condition E is that the expenditure is not subsidised (see section 1138). … 1053 Qualifying expenditure on contracted out R&D (1) A company's “qualifying expenditure on contracted out research and development” means expenditure— (a) which is incurred by it in making the qualifying element of a sub-contractor payment (see sections 1134 to 1136), and (b) in relation to which each of conditions A, C and D is met. (2) Condition A is that the expenditure is attributable to relevant research and development undertaken on behalf of the company. … (4) Condition C is that the expenditure is not incurred by the company in carrying on activities which are contracted out to the company by any person. (5) Condition D is that the expenditure is not subsidised (see section 1138). … 1138 “Subsidised expenditure” (1) For the purposes of this Part a company's expenditure is treated as subsidised— (a) if a notified State aid is, or has been, obtained in respect of— (i) the whole or part of the expenditure, or (ii) any other expenditure (whenever incurred) attributable to the same research and development project, (b) to the extent that a grant or subsidy (other than a notified State aid) is obtained in respect of the expenditure, (c) to the extent that it is otherwise met directly or indirectly by a person other than the company. (2) In this section “notified State aid” means a State aid notified to and approved by the European Commission. (3) For this purpose the following are not State aids— (a) relief under this Part,… (b) R&D tax credits under this Part. (c) R&D expenditure credits under Chapter 6A of Part 3. (4) For the purposes of this Part a notified State aid, grant, subsidy or payment that is not allocated to particular expenditure is to be allocated to expenditure of the recipient on a just and reasonable basis.”
“12. When a client wants refurbishment work done, they put the job out for tender. When that comes to Collins it is given to Collins’ pre-construction team who are involved in creating the bid for the job. Once won, the onsite team will make sure the job runs to schedule and cost, and that the project is properly delivered. There is then aftercare with the client for any snagging issues or other problems that arise. Tender Stage 13. The first stage in a project is the tender stage. Our clients usually provide tender documents that try to take the design to RIBA stage 3, which is the concept design and spatial coordination (although spatial coordination usually has to change once the project starts once the realities of the work become more clear). At this stage there is no technical design. Collins will prepare a tender proposal which will delve into the how the concept might betaken forward to the construction stage. This all takes place in a limited time frame, usually 4 to 6 weeks. 14. Before going to tender a client will have usually engaged the following consultants: (1) Architect – The Architect will develop a set of tender drawings and work with the consultant services engineer and structural engineer to ensure the scheme works in principle. They will develop a set of Employer’s Requirements which would include the drawings, specifications for materials, and preliminary requirements the contractor should consider when tendering. Dependent on the contract requirements the architect may or may not be novated as part of the contract to the successful contractor. (2) Structural Engineer - The structural engineer will carry out initial designs to confirm that the architect’s intent will structurally work and then provide a suit of structural drawings and a specification to compliment the architects design concept. Structural engineers are often novated to the successful contractor (3) Services Engineers - services engineers work with the Architect and Structural engineer to produce RIBA Stage 3 drawings and a performance specification for the contractor to price. 15. This work is usually at a high-level. The architect will provide a scheme/design of how the building should look and feel, and the engineers will note whether it works or not. They will generally undertake feasibility study at this point to get an idea of the cost of a project. 16. When costing a project Our tenders are an estimate of our expert management costs, which is time sensitive and built around our methodology for the project and the proposed programme of works. Both the methodology and the programme are generated in house by our technical staff and form the basis of our tender. The programme and methodology are entirely ‘at our risk’. During the tender period we also break down all the clients concept requirements and then send them out in packages to subcontractors to price. Our final tender sum is a combination of the preliminary costs, and the actual cost of the works from the subcontract packages, with our overheads and profit margin. The clients do not share any risk or subsidise any works, the risk and cost of the works sit solely with Collins. 17. At the time of tender we have no anticipation that research and development (“R&D”) work will be necessary to achieve a particular design. Indeed, a large number of projects in any financial year are completed without any R&D taking place, with a comparable level of information available at tender stage for both R&D and 'non-R&D' projects. When R&D Issues arise 18. Given the type of buildings we often work on, it is normal for there to be no ‘as built’ record drawing available for us or the Client to consider. It is only once the building is opened up that we have a chance to see whether any R&D work will be needed to carry out the project. 19. The curtain walling at Worple Road is a good example of this, the need for R&D arising as a result of the stripping out works and discovery of the existing building conditions that R&D will be required, but at the time of contracting it is unknown. 20. Although the designs provided by the client are meant to be at RIBA Stage 3, in reality the spatial co-ordination is often wrong. Points need changing because it is not until strip-out work commences that we can really see what is possible. 21. In short, the need for R&D will usually only arise after the project has been won. We encounter a difficulty in delivering a project and develop a solution to solve the problem. Client involvement 22. During the project we have high level meetings with clients but they are generally not interested in the technical side of projects. A lot of clients don't have the technical knowledge to understand the technical changes and R&D we carry out. Neither would they be in a position to provide the level of detail necessary to claim for a project themselves. Clients just want to make sure that they don’t have to pay any more and that the finished building has the look and feel they want. 23. There is a procedure by which clients have an opportunity to approve changes put forward in the design process. In reality a rubber stamp procedure. Usually there are no comments from clients or they simply state “no adverse comments” which means Collins proceeds at its risk. The clients are in any event not concerned with the detail. In fact, if Collins thinks that design changes meet the Employer’s Requirements in the contract, then there is in fact no need for the clients’' approval as we can continue on that basis. Risk 24. Collins takes the risk in undertaking projects, specifically the economic risk, and in the R&D work carried out. In the High Holborn project Collins made significant loss. The issue was that the sub-contractor making the bespoke panels for the external cladding went bankrupt during the project. Collins managed to buy the panels that had been manufactured and completed the manufacturing of the outstanding panels, along with directly employing a separate site team to install them.”
“At the point you sign a contract, yes, but we actually signed a letter of intent which is a contract, a binding contract which is at the beginning, so it’s irrelevant, I would say. The letter of intent is the binding contract which is signed before you get on site.”
“4… The project involved a CAT A fit-out of an existing office building in High Holborn, the addition of two stories, terrace areas and an expanded entrance reception area. The majority of the façade of the building was replaced, and a new central core, welcome and changing facilities, as well as two new shell and core retail units, were built. The plan resulted in a 30% increase in floor area, from 39,848 sq. ft. to around 53,000 sq. ft. of lettable space for the commercial office market. 5. There was no contractual requirement to undertake and/or develop works related to R&D. Collins was responsible for delivering the project in line with the contract. 6. However, and as the project progressed it became clear that R&D would be needed. Collins had received a design at RIBA Stage 3 which was information constrained and predicated on a conceptual notion that required additional investigation and development with the pertinent supply chain (Designers and/or Sub-Contractors) to complete the design to a standard ready for construction. The project required R&D in a number of areas. Set out below are explanations of two pieces of R&D work carried out in relation to this project. 7. Before that, I should note that in this project Collins sustained a significant loss. The issue was that the sub-contractor doing the making the bespoke panels for the external cladding went bankrupt during the project. Collins managed to buy the panels that had been manufactured and get a separate team to install them, but this caused delays and losses on the project. The Reverberation Issue 8. One of the pieces of R&D work that had to be carried out was in identifying and resolving a reverberation issue that arose towards the end of the project. 9. The mechanical specifications that formed part of the Employer Requirements in this project included specifications for sound levels in the office. On near finishing of the project we discovered that this requirement was not met because of noise created by internal building services (such as ventilation and air conditioning systems). 10. In light of this issue, we developed an acoustic encasement for the mechanical plant in the building which resolved this issue which ensured that the noise levels were kept to an acceptable level. 11. The client was not involved in the R&D of this issue, and it was not known as an issue that would create a need for R&D at the time of contract. Zig-zag brickwork 12. Another area which required R&D work on this project was in the development of a zig-zag brick pattern at the back of the building. 13. Originally, it had been intended that this would be done in a Sto render cladding. However, once Collins obtained the project it had become impossible to get Sto render cladding in time due to the fire at Grenfell changing the demand for different types of cladding. 14. As such, we had to look to a different solution to get the look that the client wanted, but in a different product. To do this we had to undertake R&D work to develop a zig-zag pattern in brick. 15. Again, this R&D was not specified in the contract and we did not know at the time of tender that it would have to be undertaken.”
“43. The sole issue is whether the expenditure fails to qualify for enhanced R&D relief on the basis that it is “subsidised” for the purposes of s 1052(6) (Condition E). HMRC argue that under the comprehensive code for determining when expenditure is to be treated as subsidised in s 1138, it was “met directly or indirectly” by a person other than Quinn, namely, Quinn’s Clients. 44. There is no authority directly on this point which is binding on the tribunal although Harman J’s decision in relation to similar provisions in the Capital Allowances Acts is informative and helpful. 45. To recap: (1) The main conditions for a company to be able to obtain enhanced R&D relief for an accounting period are, under s 1044, that (a) it is an SME in the period (condition A), (b) it carries on a trade in the period (condition C), and (c) (i) it has incurred “qualifying Chapter 2 expenditure”, namely, R&D which, amongst other conditions, is not “subsidised” (see s 1052(6)), (ii) which is allowable as a deduction in calculating for corporation tax purposes the profits of the trade for the period (condition D). It is integral to and underpins the highlighted conditions that the SME is expected to utilise and to seek to exploit the relevant R&D for the purposes of its trade. (2) Section 1138 is headed “Subsidised expenditure” and sets out a comprehensive set of rules for determining when expenditure on R&D is “subsidised” for the purposes of s 1052(6). In summary, under s 1138(1), there are three sets of circumstances in which for the purposes of the SME scheme a company’s expenditure is treated as subsidised: (a) “if a notified State aid is, or has been, obtained in respect of - (i) the whole or part of the expenditure....”, (b) “to the extent that a grant or subsidy (other than a notified State aid) is obtained in respect of the expenditure” ,and (c) “to the extent that it is otherwise met directly or indirectly by a person other than the company”. (3) Section 1138(1)(c) applies, therefore, on the face of it if: (a) A person other than the SME met the expenditure. On its natural meaning, as used in the context of financial obligations, I take this to mean, broadly, that the other person provides the money that is needed to pay, fulfil, satisfy or discharge the cost of the relevant R&D with the effect that the SME is not subject to or is relieved of that cost. (b) That other person met the expenditure otherwise than by way of “notified State aid”, or a “grant or subsidy (other than notified State aid)” falling within ss 1138(1)(a) or (b). (c) That other person does so either directly, such as by paying the relevant cost direct to the person charging it or, indirectly, such as by reimbursing the SME for sums it has already paid. I have commented further on the meaning of this provision below. 46. HMRC argued, in effect, that, on the plain meaning of the provision, expenditure falls within s 1138(1)(c) solely as a result of an SME, such as Quinn, undertaking ordinary commercial transactions in the course of its trade under which the SME receives from its Clients an agreed price for a service or product which the SME provides using the relevant R&D on the basis that the SME can use the price to cover its expenditure on the R&D. Their analysis relies on the view that the interpretation of s 1138(1)(c) is not in any way to be constrained, coloured or shaped by reference to the scope of the preceding provisions in ss 1138(1)(a) or (b) or the fact that s 1052(6) refers to “subsidised”, expenditure seemingly as a generalised description of what is intended to be caught (as reflected in the heading to s 1138). 47. However, in my view, on the natural interpretation of these provisions as viewed in the overall context of the SME scheme, it is apparent that s 1138(1)(c) is not intended to apply in circumstances such as those in this case, in the absence of a clear link between the price paid by the Client/customer and the expenditure on R&D: (1) The reference in s 1138(1)(c) to a person other than the SME otherwise meeting the SME’s expenditure, following on as it does from ss 1138(1)(a) and (b), is clearly based on the premise that “notified State aid” or “a grant or subsidy..” which is “obtained....in respect of” the whole or part of the relevant expenditure (within the meaning of those preceding provisions) “met” or meets that expenditure. (2) It seems to me that the further implication of the “otherwise” wording is that s 1138(1)(c) is intended to operate, in effect, as a form of sweep up provision to capture cases (a) where expenditure is not “met” by “notified State aid” or “a grant or subsidy....” (under the preceding provisions in ss 1138(1)(a) or (b)) but (b) is “met” in a similar sense to that in which expenditure may be said to be “met” by “a notified State aid” or “a grant or subsidy....”
“It is unnecessary for me to cite any further provisions of Sch 20. I would, however, make the general point that the provisions form a detailed and meticulously drafted code, with a series of defined terms and composite expressions, and a large number of carefully delineated conditions, all of which have to be satisfied if the relief is to be available. The schedule runs to 26 paragraphs and occupies ten pages in Tolley’s Yellow Tax Handbook for 2005–06. I emphasise this point because one of Mr Gordon’s submissions for Gripple is that the schedule evinces a general intention to provide enhanced relief for expenditure on R & D, and that a generous construction should where possible be adopted in order to further that general aim. I am unable to accept this submission. It seems to me, on the contrary, that a detailed and prescriptive code of this nature leaves little room for a purposive construction, and there is no substitute for going through the detailed conditions, one by one, to see if, on a fair reading, they are satisfied. It also needs to be remembered, in this context, that the relief is a generous one, which grants a deduction for notional expenditure which has not actually been incurred. Even if the relief is not available, there will be nothing to prevent the company from deducting its actual R&D expenditure in full in the computation of its trading profits, provided only that the normal ‘wholly and exclusively’ test is satisfied.” 49. Henderson J rejected the proposition that a generous construction of the SME scheme should where possible be adopted and the related notion that the SME scheme evinces a general intention to provide enhanced R&D relief. However, he did not thereby suggest that a narrow or restricted interpretation should be adopted (as is the effect of HMRC’s approach) but simply pointed out that the relief only applies where the detailed conditions are, on a fair reading, satisfied. He was plainly not advocating an approach of assessing whether the conditions are satisfied by interpreting them without any regard to context. 50.
“[73] Nevertheless, the heading of para 8 taken together with the emphasis in para 8(1) on payments by state or public entities indicates that – as Harman J found in relation to s 84 – para 8 is directed to payments by way of, or akin to, government or public authority grants or subsidies. We agree with Mr Brinsmead-Stockham that the words ‘or by any person other than the first-mentioned person’ at the end of para 8(1) should be construed consistently with the preceding examples, all of which refer to state or public bodies. If para 8 had been intended to refer to any arrangement, of whatever nature, the effect of which is that funds are provided by anyone other than the claiming taxpayer which help the taxpayer to meet a particular cost, then it could have been drafted to say, simply, ‘in so far as it has been or is to be met directly or indirectly by any person other than the first-mentioned person’. The fact that the provision is not drafted in those terms, but specifically starts by referring to payments by state or public bodies, therefore provides guidance as to the type of payment that is envisaged. [74] It follows that, in our judgment, para 8 does not encompass a payment made in return for the provision of goods or services. The essence of Harman J’s analysis was that a financier who loaned money to meet a taxpayer’s bills, as part of an arrangement under which it acquired a valuable asset for full consideration, was not ‘meeting’ the expenditure of the taxpayer on creating that asset. Likewise, we consider that, in principle, if A pays a sum of money to B in order to receive goods or services in return, on the basis of an arm’s length commercial contract, A’s payment is properly to be regarded as consideration for what A receives and not as a way of meeting B’s expenditure, even if A’s payment is calculated to reflect B’s expenditure attributable to those goods or services (with or without the addition of a profit margin). [75] Our approach to this point is very similar to that of the FTT in Quinn (London) Ltd v Revenue and Customs Comrs[2021] UKFTT 437 (TC) ,[2022] SFTD 152 . That case concerned a company’s claim to enhanced research and development (‘R&D’) allowances under Pt 13 of theCorporation Tax Act 2009 . HMRC argued that the company’s expenditure was subsidised expenditure within s 1138(1) of that Act, which provides that expenditure is subsidised if a notified state aid is obtained in respect of it or to the extent a grant or subsidy is obtained in respect of it or ‘to the extent that it is otherwise met directly or indirectly by a person other than the company’. HMRC’s argument was that the company carried out the R&D in the course of providing construction services to Clients, for which it was entitled to payment which covered the claimed expenditure. The FTT regarded the relevant words in s 1138(1) as operating as a form of sweep up provision to catch cases where expenditure is not ‘met’ by notified state aid or some other grant or subsidy but is met ‘in a similar sense’. In that context the FTT observed (at [47](3)) that a subsidy or grant ‘generally involves the provision of funds to a recipient who either provides nothing in return or provides something which, viewed from the perspective of parties acting on an arm’s length basis, does not represent a commercial return commensurate with the value of the funds provided (albeit that in some cases, such as where a public or government body provides the funds, that body may consider it is in the wider public interest to fund the relevant R&D)’.”
“50. The principle of judicial comity was succinctly described by Judge Brown KC in the case of The Executors of the Estate of Linington and another v HMRC[2023] UKFTT 89 (TC) . She said, at [177]: “In summary, the principle requires that whilst courts of competent jurisdiction are not bound by the legal conclusions of one another’s judgments, such conclusions will be highly persuasive and should be followed unless the second court is convinced that they are wrong. There was some debate as to the meaning of “convinced” (established by the Upper Tribunal to be the same as “satisfied” - see Gilchrist v The Commissioners for Her Majesty’s Revenue and Customs[2014] UKUT 169 (TCC) ), and whether the second court (or Tribunal) must consider them to be “plainly” or “clearly” wrong (as determined in HMRC v Abdul Noor[2013] UKUT 71 (TCC) ). 51. Linington concerned IHT planning arrangements that were “broadly” the same as those in the case of Salinger and Kirby v HMRC[2016] UKFTT 677 (TC) . Although the principle of comity was considered, the parties agreed that Judge Brown should “simply” reach her decision on the law and facts of the case. If, as a result, she came to a different conclusion than the Tribunal had in Salinger, she should determine the appeal by reference to her own conclusions without considering whether she “was ‘convinced’ or ‘satisfied’ that Salinger was wrong” (see Linington at [178]). 52. This is, in fact, exactly what she did saying, at [179]: “I express no view on whether, in the light of the evidence available to it, the Tribunal in Salinger was wrong, but I have reached a different conclusion by reference to the evidence and legal arguments as they were presented to me.” 53. It is clear from an article in Taxation by the appellant in Linington who had appeared in person – HMRC were represented by two counsel – that permission had been granted for an appeal against the decision Salinger which had initially been listed before the Upper Tribunal for30 April 2018 . However: “ … just a few days before the hearing I was told that it had been postponed. It was rescheduled for November 2018 and a few days before the hearing date HMRC informed me that it was now no longer going to take place. HMRC refused to give a reason for this, stating taxpayers’ confidentiality. However, my understanding is that the Salinger family pulled out due to concerns about costs.”
“1138 “Subsidised expenditure” (1) For the purposes of this Part a company's expenditure is treated as subsidised— (a) if a notified State aid is, or has been, obtained in respect of— (i) the whole or part of the expenditure, or (ii) any other expenditure (whenever incurred) attributable to the same research and development project, (b) to the extent that a grant or subsidy (other than a notified State aid) is obtained in respect of the expenditure, (c) to the extent that it is otherwise met directly or indirectly by a person other than the company.”
“The use of that particular term indicates the scope of Condition E in general terms as then further explained in s 1138, albeit that the use of that term in the heading to that section does not control the operation of the substantive provisions in that section.”
“[40] What I understand Laws J to be saying is that the identification of the parties’ obligations is a matter of contract. But once their obligations have been identified, the nature or classification of those obligations, and in particular whether they answer a particular statutory description, is not necessarily concluded by the contract. It may well be, even in a tripartite situation, that they do; but it is not inevitable. Read in this way, it seems to me that Reed exemplifies a common method of reasoning. The court is often called upon to decide whether a written contract falls within a particular legal description. In so doing the court will identify the rights and obligations of the parties as a matter of construction of the written agreement; but it will then go on to consider whether those obligations fall within the relevant legal description. Thus the question may be whether those rights and obligations are properly characterised as a licence or tenancy (as in Street v Mountford[1985] 2 All ER 289 ,[1985] AC 809 ); or as a fixed or floating charge (as in Agnew v IRC[2001] UKPC 28 ,[2001] 2 AC 710 ), or as a consumer hire agreement (as in TRM Copy Centres (UK) Ltd v Lanwall Services Ltd[2009] UKHL 35 ,[2009] 4 All ER 33 ,[2009] 1 WLR 1375 ). In all these cases the starting point is to identify the legal rights and obligations of the parties as a matter of contract before going on to classify them.”
“Although many of the Client specifications could be achieved using standard processes within the industry, many specifications could not be met using readily available solutions. This was because either an appropriate solution did not exist or a solution was not feasible in this context.” (2) The Report goes on to list the R&D activities Collins undertook in order to meet the Client’s contractual specifications and there are examples within the projects where there was express reference within the contractual documents to something which has been claimed as R&D expenditure. (3) In respect of the Euston Road project, the Architectural Information states in relation to ‘methodology’ for demolition works “mindful of the access limitations on Stephenson Way due to the HS2 works”. (4) In the 2019 R&D Report, the list of R&D activities stipulated for this project included advances sought because of “road and traffic restrictions due to HS2”. (5) In respect of the Coronet Street project, the expenditure on the doors was incurred in the course of carrying on activities contracted out to Collins by its customer. The ‘Fire Stopping Systems’ document provides the requirements and performance specification. The fire strategy drawings detail that the fire doors were required to have a fire rating of 30 minutes. Drawings specify for there to be a “bronze finish” to the doors and the fire doors are included within the contract sum analysis. (6) The 2018 R&D Report lists a number of aspects of the Coronet Street project. In relation to ‘Fire Escape Doors’ it states “The Client wanted brass cladding to be incorporated into the fire escape doors for aesthetics purposes. As a consequence of incorporating brass (an unconventional material to use in this context), the overall product would lose its fire rating and would not pass relevant health and safety regulations. CCL therefore sought to develop a method which would not only meet the aesthetic specifications from the Client, but also achieve a certified thirty-minute fire rating.”