A builder from South London has won a ￡1m case with HMRC

A builder from South London has won a ￡1m case with HMRC after being accused of flipping properties without paying tax. Gary Ives renovated and sold three family homes between 2008 and 2013, but the tax authority said these activities constituted a trade and therefore the profits should be subject to income tax.

Tribunal Judge Harriet Morgan of the First-Tier Tribunal (FTT) Tax Chamber delivered her verdict in the dispute between construction company Quinn (London) Limited and HMRC on 27 October 2021. The FTT ruled in favour of Quinn, stating that the company was eligible for enhanced SME research and development tax relief (“enhanced R&D relief”) amounting to approximately ￡1m.

Enhanced R&D relief allows companies to deduct 130% of their qualifying expenditure from their otherwise taxable profits (provided certain conditions are met). It is an important regime for promoting innovation. If HMRC had won its arguments, it would likely have significantly limited the ability of SMEs to access the relief.

The issue in dispute An SME must meet a number of conditions to qualify for enhanced R&D relief. Apart from one condition, HMRC agreed that these were met by Quinn.

To qualify for enhanced R&D relief, the relevant R&D expenditure must not be “subsidised expenditure”, according to section 1138(1)? of the Corporation Tax Act 2009. It was this condition that HMRC challenged.

HMRC claimed that Quinn was not entitled to the enhanced R&D relief because the R&D was carried out in the course of Quinn providing services to its clients for which Quinn received payment in enough amount to cover the claimed R&D expenditure, and so was “subsidised” indirectly. Quinn argued that its clients did not pay for Quinn’s R&D expenditure and paid only for the completed construction works, and so the R&D itself was not “subsidised”.

Tribunal Judge Harriet Morgan decided that a fair reading of 1138(1)