HMRC has specific rules on claiming R&D Tax Credits for subcontracted R&D. Here’s what you need to know.
Many companies choose to subcontract parts of their development work out to other businesses.
This lets them access specialist knowledge that isn’t available among their employees. And increases the chance that their R&D will be successful.
Thankfully, HMRC does allow businesses to claim R&D Tax Credits for development work they subcontract to another company.
And for R&D they were subcontracted to perform by another business.
But 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 Credits for subcontracted R&D?
Fundamentally, whether you can claim R&D Tax Credits for subcontracted development work depends on three things:
- Who did the subcontracting?
- Which schemes the companies involved are applying to?
- Whether the subcontractor and the subcontracted company 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 about which scheme you should 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 applying for SME tax relief can include up to 65% of eligible subcontractor costs in their claim.
This is so long as the two companies are not ‘connected’. Which means controlled by the same shareholders.
More on connected companies below.
The subcontractor doesn’t need to be based in the UK. And the subcontracted R&D doesn’t need to take place in the UK, either.
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 perform by another SME.
However, SMEs can claim development costs through the RDEC scheme if they have been subcontracted by an SME – assuming the subcontractor is the rightful claimant – or a large company.
You can read more about the difference between large companies and SMEs here.
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, but they cannot claim for 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.
Claim for subcontracted R&D compliantly
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.
GrantTree’s R&D Tax Credits experts would be happy to put your mind at ease!
