Two First-tier Tribunal decisions, Collins Construction Ltd v HMRC and Stage One Creative Services Ltd v HMRC, rejected HMRC’s interpretation of subsidised and subcontracted R&D under the old SME scheme. Neither decision was appealed, and HMRC updated its guidance in February 2025. For companies with old-scheme accounting periods still open to amendment, and for anyone defending an enquiry into an old-scheme claim, these cases remain the reference points.
This article was first published after the Stage One verdict and has been revised in July 2026 to cover what happened next.
Why did these cases reach the tribunal?
From late 2021, HMRC hardened its reading of two restrictions in the old SME scheme. It argued that where a company did R&D in the course of work for a paying customer, the expenditure was either “subsidised” by the customer’s payments or the R&D had been subcontracted to the company, and in both cases the SME claim failed.
Stage One Creative Services, a creative design and construction business, had its SME claims challenged on exactly those grounds. It appealed, as Collins Construction had before it. In both cases the tribunal found for the taxpayer: payments under an ordinary commercial contract are not, in themselves, a subsidy, and being paid to deliver a project does not by itself make you a subcontractor of R&D.
What did HMRC do after losing?
Neither decision was appealed, and HMRC updated its Corporate Intangibles Research and Development (CIRD) guidance in February 2025. The updated guidance drops the blanket position and assesses who can claim case by case; we cover the detail in our article on HMRC’s updated subcontracting guidance.
Two points from the cases now anchor that analysis. Commercial contract payments are not, in themselves, subsidies. And contracted-out R&D under the old SME scheme has no single definitive test: the contract terms, autonomy, financial risk and IP position all bear on it.
Do First-tier Tribunal decisions change the law?
No. FTT decisions bind only the parties and do not set precedent. But where a decision goes unappealed and HMRC rewrites its guidance to match, the practical effect is real: the interpretation that caused claims to be refused between 2021 and 2024 is no longer HMRC’s stated position.
Matthew Jones commented when the Stage One decision landed: “While they don’t offer concrete legal changes, they validate what many advisers and businesses have long argued: the interpretations being applied were not right. I particularly sympathise with startups and smaller companies that rely heavily on R&D tax relief to sustain their innovation.”
What should affected companies do now?
Three situations are worth acting on. If your company was refused, or chose not to claim, on subsidy or subcontracting grounds for an old-scheme period, check whether the period is still amendable: the window runs two years from the end of the period of account, with the last standard old-scheme deadlines in late March 2027. Our guide to backdated R&D claims explains the runway and the claim-notification interaction that can silently close it.
If you are in an open enquiry on these grounds, the tribunal reasoning and the revised guidance belong at the centre of your defence. This is the kind of position we run in practice; see HMRC enquiry defence.
And if you do contract R&D for customers today, note that the merged scheme replaced all of this with a statutory test: the customer claims only where, when the contract was made, it intended or contemplated that R&D of that sort would be undertaken. Our page on contracted-out R&D sets out how the new test works, including for engineering businesses whose development work sits inside client projects.
Both of these cases turned on who owns a claim. For a tribunal decision that turned on whether there was a claim at all — a care operator’s Covid-era claim dismissed on the statutory tests and the evidence — see Tanglewood Care Services v HMRC.
If any of these situations looks like yours, talk it through with a chartered adviser. The facts of your contracts decide the outcome, and they are worth reading properly.
Sources
- Collins Construction Ltd v HMRC — the decision, cited as [2024] UKFTT 951 (TC), 21 October 2024: expenditure not subsidised under section 1138, the R&D not contracted out, appeal allowed.
- Stage One Creative Services Ltd v HMRC — the decision, cited as [2024] UKFTT 1059 (TC), 25 November 2024: the same two issues and the same outcome.
- CIRD84250: subcontracted R&D (post-tribunal) — HMRC’s case-by-case factors for subcontracted R&D after the First-tier Tribunal decisions.
- CIRD81650: subsidised expenditure (post-tribunal) — HMRC’s position that commercial contract payments are not, in themselves, subsidies.
This article describes the rules as they stood at the review date above. The rules change: for the current position, start with our guides or talk to us.
