R&D tax relief •11 min read

Collins Construction Ltd v HMRC

MJ

Matthew Jones ACA CTA

Last reviewed September 2026 · Editorial standards

Tribunal
First-tier Tribunal (Tax Chamber)
Decided
21 October 2024
Judge
Judge Kim Sukul and Sonia Gable

The company succeeded on both limbs. HMRC had argued that a fit-out contractor’s expenditure was met indirectly by the clients who paid for the buildings, and that the same contracts had contracted the work out to it. The tribunal rejected both and allowed the appeal (paragraph 75). No onward appeal has been reported. HMRC has since recorded that it accepts the decision, and rewrote the two manual pages on those conditions. The case decided the old SME scheme. Periods beginning on or after 1 April 2024 turn on a different question.

What was at issue

Collins is “a specialist refurbishment and fit out contractor” doing “cut and carve” work on 1960s and 1970s buildings, commercial fit outs and medical refurbishment (paragraph 24(1)). It claimed SME relief across 27 projects (paragraph 11) for the years ended 30 June 2018 and 2019. The closure notices of 28 September 2021 rejected a repayment claim of £573,056.72 for 2018 and a payable credit claim of £2,670,972.94 for 2019 (paragraph 1).

The claims sat in Chapter 2 of Part 13 CTA 2009, the old SME scheme. Two conditions were disputed and nothing else: “It is not in dispute that Collins is an SME and that they satisfied all of the other conditions for relief” (paragraph 13). HMRC did not argue the work failed the Guidelines. The issues were framed at paragraph 12. The first was whether the expenditure was “subsidised expenditure” under sections 1052(6) and 1053(5). The second was whether it was “…incurred by the company in carrying on activities which are contracted out to the company by any person” under sections 1052(5) and 1053(4).

How the dispute got to a hearing

The decision does not record when the enquiries were opened. The closure notices for both periods issued on 28 September 2021 (paragraph 1). The appeal reference is TC/2022/11690, so it reached the tribunal in 2022. It was heard at Taylor House, London on 12 and 13 December 2023 before Judge Kim Sukul and Member Sonia Gable, and released on 21 October 2024. Collins was represented by Edward Hellier of counsel, instructed by Fiscale Ltd; HMRC by Francis Fitzpatrick KC and Sarah Black.

Twenty-five sets of contract documents were in evidence, on four JCT standard forms (paragraph 17). Collins called its managing director in the period and a project director, both “credible and reliable” (paragraphs 20, 22). HMRC’s two officers gave evidence of “limited evidential value” on “the way in which Collins conducts its business or operates its contracts” (paragraph 19).

What each side argued

HMRC read section 1138(1)(c) as a free-standing third category: “otherwise” shows that paragraph (c) “is concerned with something other than a notified State Aid or grant or subsidy, so a third category which has its own specific test and ambit” (paragraph 28). “Met” meant discharging a financial obligation, so payment under a construction contract met the costs indirectly — “the clients indirectly ‘met’ the expenditure by paying Collins for the works. There is nothing absurd or surprising in this result” (paragraph 31).

Its contracted-out case was structural: identify the activities the contract obliged Collins to perform, then ask whether the expenditure was incurred in carrying them on. “There is no reference in the statutory provision to ‘specific activities’ or ‘R&D activities’ having been contracted out”, and the test “does not depend on the parties’ intentions or what was in their ‘reasonable contemplation at the time of contract’” (paragraph 62). HMRC called the condition “a broad prophylactic provision” confining the enhanced relief to the principal funding the work (paragraph 69), and pointed at Collins’s own claim reports, which listed activities undertaken to meet clients’ specifications (paragraph 65).

Collins argued the bargain was for works, not for research: the agreed price “may or may not in fact be sufficient to cover the costs Collins actually incurs” (paragraph 33). Of its seven contracted-out points (paragraph 66), four bear on the findings the tribunal went on to make. The contracts neither required nor envisaged the work. Specifications that led to it were indistinguishable from those that did not. There was no payment for it, and Collins bore the risk. And on ownership: “In the vast majority of projects, Collins retained intellectual property it created in fulfilling the contract and was free to deploy any advances in its future work.”

The provision the case turns on

Section 1138 CTA 2009, in the version in force for these periods and superseded on 1 April 2024, treated expenditure as subsidised —

“(c) to the extent that it is otherwise met directly or indirectly by a person other than the company.”

Section 1052, on in-house direct R&D, carried both restrictions:

“(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).”

Section 1053 applies the same tests to contracted-out R&D as Conditions C and D. HMRC’s guidance sits at CIRD81650 and CIRD84250, both rewritten after this decision.

What the tribunal decided

The tribunal took subsidy first (paragraph 25). The starting point was whether to follow Quinn (London) Ltd v HMRC [2021] UKFTT 437 (TC), an earlier decision on the same words, against which no onward appeal has been reported. It should follow a decision of coordinate jurisdiction unless satisfied that decision was wrong (paragraph 48). It was not: “we considered there to be striking similarities in both cases” (paragraph 50).

It then took HMRC’s criticisms of Quinn in turn. On “otherwise”, Quinn had not erred in reading it “as intended to operate as a form of sweep up provision to capture cases where expenditure is met in a similar sense to the previously referred to categories” (paragraph 51). On whether a link between funding and expenditure is needed: “the use of the word ‘met’ in section 1138(1)(c) of itself suggests that there must be such a link” (paragraph 53). On Perenco: “the Upper Tribunal was fully aware that the cases concerned different statutory regimes” (paragraph 56). The conclusion: “the relevant expenditure was not subsidised expenditure for the purposes of section 1138” (paragraph 58).

On contracting out it adopted the two-stage approach in A1 Lofts Ltd v HMRC [2010] STC 214 at [40]: identify the parties’ obligations, then ask whether they answer the statutory description (paragraph 63). At the first stage: “under the contracts, clients do not agree to pay or reimburse Collins for carrying out the relevant R&D, and Collins does not agree to carry out the relevant R&D on being paid or reimbursed by the client for doing so. In other words, the bargain made between the parties is not for Collins to undertake R&D activities on behalf of the client” (paragraph 67(4)).

At the second stage it rejected HMRC’s account of what the condition is for. Read with section 1053, “these rules operate to prevent double relief for the same R&D by passing the ability to claim up the chain to the company that has commissioned, and paid for, the R&D activity. That is a limited and direct purpose” (paragraph 70). That settled the words: “the natural meaning of the words used in the provisions excludes the relief in circumstances where the qualifying expenditure is on research and development activities, when those activities are carried out on behalf of another person” (paragraph 73). The appeal was allowed (paragraph 75), and nothing was decided against the company.

What HMRC did afterwards

It amended CIRD81650 and CIRD84250 on 27 February 2025, the change log giving the reasons as “Updated to reflect FtT decisions” and “Redraft following FtT decisions”. Both carry the line “The guidance on this page has been amended to reflect HMRC’s view following recent First-tier Tribunal decisions”. Neither names Collins. CIRD81650 now states the position in two halves. Where the R&D activities are not contracted to the company, payments from a principal do not subsidise them “unless the payment is specifically linked to those activities”. Where they are contracted to the company, the expenditure may be subsidised to the extent the principal meets it. CIRD84250 lists first that “If the R&D is incidental to the supply of a product or service, it is not contracted out”.

The naming happens in the Research and Development Communication Forum minutes of 6 May 2025: “HMRC accepts the tribunal’s decisions and has updated its position and approach based on those.” No route back was opened for companies whose positions had already become final — “While the tribunal disagreed with HMRC’s interpretation it did not find that HMRC’s position was without basis. Therefore, HMRC has not established a similar mechanism to the reimbursed expenditure/expenses in this instance.” The forum has published minutes of one meeting since, for 10 March 2026, and they do not revisit the decisions.

What it changes for a claim being prepared now

If an enquiry is open on an old-scheme period and HMRC is running either argument, this decision and HMRC’s revised guidance belong at the centre of the reply. If a company never claimed because it was told a customer’s payments ruled it out, the question is whether the period is still open: see backdated claims.

  • Put the contract in the file, not just the claim report. The findings came off contracts and tender documents: who set the specification, who carried the cost of getting it wrong, who owned the result. The tribunal found that Collins “retains any intellectual property rights relating to their innovations during a project (subject to the client’s right to specific use) and takes the economic risk in producing those innovations” (paragraph 24(10)).
  • Record when the technical difficulty emerged. Collins’s evidence was that the work became necessary after the job was won, once the building was opened up — not a commission to carry out research.
  • Write the sentence that answers the subsidy point while the work runs. One dated line: the price was agreed for the finished works; no part of it reimburses the development work; that cost fell on the company whether or not the work succeeded. That is what paragraph 67(4) looked for.
  • Do not carry the finding into a current period. For periods beginning on or after 1 April 2024 the test is section 1133(2)(c) CTA 2009. It asks whether “it is reasonable to assume, having regard to the terms of the contract and any surrounding circumstances, that the person intended or contemplated when entering into the contract that research and development of that sort would be undertaken”. What matters is what the customer contemplated, not whether the company agreed to do research. Subsidised expenditure no longer reduces relief. See contracted-out R&D.

Where it sits against the other decisions

Collins follows Quinn, which decided the subsidy point on similar construction contracts and against which no onward appeal has been reported. The nearest thing to higher authority is HMRC v Perenco UK Ltd [2023] UKUT 169 (TCC). That is a petroleum revenue tax case on paragraph 8 of Schedule 3 to the Oil Taxation Act 1975, reaching the same conclusion on other wording. Where A pays B for goods or services “on the basis of an arm’s length commercial contract”, it held, “A’s payment is properly to be regarded as consideration for what A receives and not as a way of meeting B’s expenditure” (paragraph 74). That holds “even if A’s payment is calculated to reflect B’s expenditure attributable to those goods or services”. At paragraph 75 the Upper Tribunal added: “Our approach to this point is very similar to that of the FTT in Quinn (London) Limited v HMRC [2021] UKFTT 437 (TC).” That observation decided nothing about section 1138. Perenco construed the oil-tax provision, and the analogy with Quinn is the Upper Tribunal’s own.

Stage One Creative Services followed a month later on the same two limbs. LR R&D LLP v HMRC [2025] UKFTT 245 (TC) extended the line to debt funding, holding at paragraph 218 that “a loan is not within the scope of what is intended by condition D” — obiter, the LLP having been found not to trade. The contrast is Hadee Engineering, where contracts did identify the work as an obligation and a cost for payment.

Has it been appealed?

No onward appeal has been reported, and no Upper Tribunal or Court of Appeal decision naming Collins Construction appears on the published record as at the review date above. Applications for permission are not consistently published, so silence is not proof that none was made. HMRC’s position is the better evidence: it accepts the decision and has amended its guidance.

This remains a First-tier Tribunal decision on its own facts: it binds only the parties, sets no precedent and changes no legislation. See the register of R&D case law.

Sources

Every CIRD paragraph cited above (CIRD81650 and CIRD84250) is indexed on our CIRD reference index, with HMRC’s own title for each, a line on what it says and the date HMRC last revised it.

First-tier Tribunal decisions bind only the parties to them and set no precedent. This entry describes the decision as it stood at the review date above, as general information rather than advice on your circumstances — see our terms. For an answer on your own facts, talk to us.