HMRC has specific rules on claiming R&D Tax Relief for subcontractors and subcontracted R&D. Here’s what you need to know.
Many companies subcontract parts of their research development work to other organisations or individuals. This lets them access specialist knowledge and skills they don’t possess in-house. It also increases the chances that their R&D will be successful.
Helpfully, HMRC allows businesses to claim R&D Tax Relief for development work they subcontract to another company. And for R&D they were subcontracted to perform by another business.
However, the rules around claiming R&D Tax Credits for this are pretty complicated. So let’s take a look.
Can I claim R&D Tax Relief for subcontracted R&D?
Companies can claim R&D Tax Relief for subcontractors and subcontracted R&D. But not always.
Whether you can claim R&D Tax Credits for subcontracted development work depends on three things:
- Who did the subcontracting
- Which schemes you and your subcontractor(s) are applying to
- Whether the two companies are connected
When we say ‘which schemes’, we’re talking about SME R&D Tax Relief and the Research and Development expenditure credit (RDEC).
These are the two initiatives that make up R&D Tax Credits. You can read more about which scheme to apply to here.
Now, let’s look at the different subcontracting scenarios and how they play out R&D Tax Credit rules.
Scenario 1: The subcontracting company is applying for SME R&D Tax Relief
Companies eligible for SME R&D Tax Relief can claim relief on up to 65% of their qualifying subcontractor costs.
This is so long as the two companies are not ‘connected’. Which means controlled by the same shareholders.
More on connected companies below.
Scenario 2: The subcontracting company is applying for RDEC
The RDEC scheme does not allow large companies to claim R&D Tax Relief for development work they subcontract to limited companies.
However, large companies can claim relief on 100% of the development work they subcontract to:
- Charities
- Higher education institutes
- Scientific research organisations
- Health service bodies
- Individuals
- Partnership of individuals.
Scenario 3: The subcontractor is applying for SME R&D Tax Relief
The SME scheme does not allow companies to claim for any expenses associated with work they’ve been subcontracted to conduct by another SME.
However, small and medium-sized businesses can claim for work they’ve been subcontracted to perform by another SME or a large company through the RDEC scheme, assuming they’re the rightful claimant.
Read more about the official definition of small, medium, and large companies.
Connected subcontractors
Two companies are considered ‘connected’ if they are controlled by the same shareholders.
SMEs can claim for work they subcontract to a connected business. However, they cannot claim relief on 65% of their costs.
Instead, they have to claim for “the lesser of 100% of the R&D payment made to the subcontractor and the relevant expenditure in the connected party’s accounts.”
Large companies, on the other hand, cannot claim subcontractor costs paid to a connected company. That is unless the subcontractor is one of the organisations listed in the previous section.
Large companies can claim for the costs of staff provided by another company in their group, however.
Questions about subcontracted R&D?
Hopefully, this blog has shed some light on the complicated rules on claiming R&D Tax Credits for subcontracted R&D.
If you have any questions about subcontracted R&D, or anything else related to R&D Tax Credits, just drop us a line.
Our R&D Tax Credits experts would be happy to put your mind at ease!
