Tax Journal

R&D relief: importance of payment

1 December 2016

Most of the categories of eligible expenditure require that the expenditure is not only incurred but also paid before being eligible for inclusion in a claim for research and development (R&D) tax relief. The First-tier Tribunal recently had to consider the question of whether an anticipatory R&D claim could be made before payment had actually been made. The decision in the appeal was (in my opinion) entirely predictable, but it seems HMRC’s guidance may actually be too generous. Revenue expenditure included in intangible fixed assets can be treated as deductible in the year incurred.

David O’Keeffe (Aiglon Consulting) reviews the tribunal decision in Gas Recovery And Recycle Ltd, which considered whether an anticipatory R&D claim could be made before payment had actually been made.

In the recent case of Gas Recovery And Recycle Ltd v HMRC [2016] UKFTT 746 (TC), the First-tier Tribunal had to consider when the deadline was for payment of research and development (R&D) expenditure in order for it to be included in a valid R&D relief claim.

Requirement for ‘payment’

Any company undertaking qualifying R&D and making an R&D tax relief claim will have incurred expenditure on one or more eligible cost category. Advisers not familiar with the R&D tax relief legislation may be surprised to know that, for some of these cost categories, there is also a requirement that the amount has actually been paid (rather than simply incurred) before relief can be claimed. This is the case for the following categories:

staffing costs; externally provided workers; subcontracted R&D (SME scheme); payments to clinical trial subjects; and contributions to independent R&D (large companies).

The case before the tribunal concerned subcontracting payments, so I will refer to that legislation. The principles apply equally, however, to all of the areas listed.

CTA 2009 s 1051 provides that an SME’s ‘qualifying Chapter 2 expenditure’, on which it is going to claim R&D tax relief, includes ‘its qualifying expenditure on contracted out research and development (see s 1053)’. The pertinent part of s 1053 provides that:

'(1) A company’s “qualifying expenditure on contracted

out research and development” means expenditure:

(a) which is incurred ...

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