HMRC's tribunal: What does it mean for the future of client-led R&D projects?

Even with professional support, many companies are unsure how HMRC evaluates subsidy and whether paid client work can jeopardise eligibility. This article breaks down the case, explains why it matters and explores the wider implications for businesses delivering client-funded innovation.

Quinn London vs HMRC: what happened?

Quinn London, a building contractor, claimed enhanced SME R&D tax relief for several projects involving technological and capability advances. As part of the SME scheme, companies must show that their qualifying R&D expenditure has not been subsidised – meaning covered in part or in full by a third party.

HMRC rejected the claim, arguing that client payments for the finished construction work were enough to demonstrate that the R&D had been subsidised.

Quinn appealed, and the First Tier Tribunal ruled in its favour, awarding approximately £1 million in relief.

Why the Tribunal disagreed with HMRC

Tribunal Judge Harriet Morgan found that HMRC’s interpretation was too broad. She stated that expenditure can only be considered subsidised if there is a clear link between client payments and the R&D activity itself.

She noted that denying relief simply because an SME commercialises the results of its own R&D would contradict the purpose of the scheme. HMRC’s position, she argued, would effectively limit R&D tax relief to projects with no commercial value.

Why this case is so significant

A challenge to HMRC’s expanding definition of subsidy

Historically, subsidy applied to grant funding or explicit third-party financial support. More recently, HMRC has taken a broader approach, suggesting that any paid client work might count as subsidised and therefore disqualify R&D claims.

If applied universally, this would have major consequences. Many SMEs undertake R&D within fee-paid client projects, particularly in sectors such as construction, engineering, software and manufacturing.

Thousands of businesses rely on client-driven R&D

The Tribunal’s ruling reassures businesses that assume the financial and technical risk of solving complex problems for clients. It confirms that commercial contracts do not automatically render R&D ineligible.

This matters far beyond construction. Many UK SMEs advance science and technology precisely through work delivered for customers.

Implications for SME claimants

Relief for legitimate claimants, but enquiries will continue

Although the judgement supports SMEs, HMRC has confirmed that it will continue opening enquiries based on alleged subsidised expenditure. This creates ongoing uncertainty for companies with genuine R&D embedded in client projects.

The reality: not every business can navigate a tribunal

The Quinn London case took years of argument, documentation and legal scrutiny. Most SMEs lack the resources, technical support or resilience to challenge HMRC at Tribunal level – even when they are fully entitled to relief.

This raises concerns about deterrence: businesses may decide the perceived risk of enquiry outweighs the benefit of claiming. That outcome undermines the core purpose of the R&D incentive: encouraging innovation and technological progress.

We need more clarity from HMRC

HMRC has a duty to monitor the R&D incentives, and it may yet continue to investigate client-led R&D projects. Its initial change in subsidy definition was likely aimed at clamping down on fraudulent claims, and that’s something most businesses and R&D advisers will welcome.While the Quinn case has shown what we can expect from a judicial perspective, it doesn’t tell us where HMRC currently stands on the issue – and that uncertainty will require some redressive clarity in the coming years.

By providing further guidance, much like it did around software expenditure, HMRC could assist businesses in planning while also making its job more manageable. For the best results, this kind of guidance should be built from further consultation with the industry and with businesses seeking to claim this kind of relief.

Final word: enquiries happen

Businesses can’t avoid HMRC enquiries. What they can do is ensure their original submissions and all subsequent documentation show clearly and consistently the boundaries and ownership of all R&D work.

At Kene, our approach has always been to build a robust claim with a clear methodology for HMRC at the front end of every claim. This means all our claims deliver the maximum value for our client's investment in innovation while withstanding any scrutiny from HMRC.For more information, watch our recent round-table discussion on the topic or get in touch with our team of expert advisers today.