A guide to claiming R&D Tax Relief for subcontracted work

  • By Christalin Thevathasan
    • Sep 28, 2023
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Subcontracting work for research and development purposes brings many advantages. It allows companies to leverage subcontractors’ specialised skills and expertise, helping to improve the quality and efficiency of the research process. It also helps organisations manage their resources more effectively, so that they can focus on their core business functions while outsourcing specific R&D tasks.

Even if a business is using subcontractors for their R&D, they may be able to claim R&D Tax Relief – a significant incentive for businesses investing in innovation. The support offered by HMRC can provide a substantial reduction in corporation tax or, for loss-making companies, a cash credit.

To help businesses take advantage of this incentive, this article explores the rules around claiming tax credits for subcontracted R&D projects.

Can you claim R&D Tax Credits for subcontracted work?

You can claim up to 65% of the costs paid to an unconnected subcontractor for R&D activity if you’re a small or medium-sized enterprise claiming through the SME scheme. Larger companies claiming under the RDEC scheme can only use specific types of subcontractors.

What is classed as subcontracted activity for claiming R&D Tax Relief?

The definition is reasonably simple under the SME scheme: if there’s a contract between two parties for R&D activities to be carried out by one for the other, these are considered subcontracted activities.

But there are some exceptions that you won’t be able to claim for, including:

  • Paying another company for workers or materials for R&D
  • Any R&D activities that take place after a contract has ended, even if the activities are relevant
  • Providing expert advice and charging for time
  • When a company carries out R&D and receives a subsidy from another entity (this is classed as subsidised expenditure)
  • When two companies jointly pursue R&D (each can instead potentially claim R&D Tax Relief for its share of the qualifying expenditure – this is known as collaborative research).

These activities are not considered to be subcontracting when claiming R&D Tax Credits.

Can SMEs claim for subcontracted R&D?

If you’re claiming through the SME scheme, you can receive up to 65% of the costs paid to a subcontractor for R&D work (as long as the subcontractor is not connected to your business). This is also the case if the subcontractor uses a third party to complete the work (they don’t have to do the work themselves).

If however, the companies are connected (in the sense that they’re controlled by the same shareholders) the claim will be based on whichever amount is less: the payment made to the subcontractor or the relevant expenditure of the subcontractor. This is provided that the total subcontracted work payment is accounted for when determining the subcontractor’s profit.

Does subcontracted R&D activity have to take place in the UK?

For SME scheme claims there’s no requirement for the subcontractor to reside in the UK, nor does the subcontracted R&D need to take place within the country (for the moment at least). The rules are set to change from April 2024, when you’ll no longer be able to claim for subcontracted work that’s been conducted overseas, unless it is unreasonable for the company to replicate the conditions in the UK.

You can find out more about the changes by reading our article: Overseas R&D expenditure: everything you need to know about qualifying overseas expenditure (QOE).

Does the subcontracted activity have to involve research and development?

If you’re claiming through the SME scheme, the specific task performed by the subcontractor may not, on its own, need to be classified as R&D. For example, a material might be sent for analysis or for a stress test, or a manufacturing specialist might be needed to build a custom device. While these might be routine activities for the subcontractor, the work may still count as R&D because it is part of a larger R&D project.

Can large organisations claim for subcontracted R&D?

Larger companies claiming under RDEC can generally not claim for most subcontracted work. However, there are exceptions.

100% of eligible spending can be claimed as long as the subcontractors were individuals, a partnership where each member is an individual, or a qualifying body. A qualifying body can refer to a charity, a scientific research organisation, a health service body, or an institution of higher education such as a university.

Can subcontracted companies claim for R&D Tax Relief?

Subcontracted SMEs can claim for their R&D work through the RDEC scheme (preventing them from claiming under the SME scheme).

How can Leyton help?

The rules around subcontracted work are complex. Our experts can help maximise your potential benefit and ensure that your claim is compliant by reviewing your subcontracted work, identifying activities that qualify for your R&D Tax Credits claim.

Speak to an expert today.

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Christalin Thevathasan

Senior Tax Consultant

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