Share this content

Research and Development Tax Credits

Research and Development Tax Credits

I'm trying to understand the details of  R&D Tax Credits and have some questions - could anyone help please?

Firstly under the expenditure heading Staff Providers, HMRC say ‘ The staff provider needs to contract with the individual whose services they supply’ – what does this mean exactly? If you have the (pretty common) scenario of a company > agency > service company >service company director, and the director of the service company is the technical expert carrying out work on an R&D project for the main company, can the main company claim this as R&D expenditure?

Secondly if work is subcontracted out can this expenditure be claimed, and if so am I correct in thinking that the amount of the claim is 65% of the expenditure involved (I'm not quite sure of the logic behind 65%, is it half of the 130% large company %?).

Thirdly does the 7.5 million Euro upper limit specifically apply to the SME scheme only?

Fourthly Capital Expenditure. If equipment is bought specifically for the R&D project, can 100% of the expenditure be claimed, but it is not claimed as a CA but instead added to the year’s R&D expenditure (so ends up as part of the 200%/220% claim)? This being with the proviso that when the equipment is sold the balancing charge reduces the R&D expenditure in a future year (and what happens if the equipment sale is in a year when there isn’t any R&D expenditure)?

Finally is there a recommended book on R&D Tax Credits?

Thanks for any help.


Please login or register to join the discussion.

27th Apr 2012 15:57

On staff providers, you can't claim where the relationship is R&D company>agency>service company>worker. There has to be a tripartite relationship being R&D company>staff provider>worker. This anomaly is well-documented and as a result of lobbying has been rectified from April 2012 onwards.

Subcontract R&D costs are restricted to 65% as you say. The 65% was arrived at during the design of the legislation to cover the arbitrary profit margin of the subbie.

The €7.5m limit applies only to the SME scheme.

Capital R&D expenditure is not eligible for the enhanced deduction, only the 100% allowance.

Thanks (1)
27th Apr 2012 16:10


Externally provided workers - as explained in CIRD84000, the legislation is based on a tripartite arrangement between the R&D claimant company, the staff provider and the individual worker. If another company is inserted between the staff provider and the worker, for example if the individual has a personal service company that contracts with the staff provider for the supply of his or her services to the R&D company, then the worker will not qualify as an externally provided worker.  I think the HMRC manuals directly answer your question.

Subcontracted expenditure - what you can claim depends if you are in the SME scheme or the large company scheme.  Assuming we are talking SME, then you also need to establish if the subcontractor is connected or unconnected.  The 65% percentage is only applicable to unconnected subcontractors.  The reason for this percentage is that it's not possible to analyse the unconnected contractor's expenditure to identify the qualifying costs (salaries, consumable supplies and so on).  So they estimate that 65% of the costs are qualifying, and the balance are non-qualifying cost categories.

HMRC manuals CIRD81160 states that the 7.5m Euro limit applies only to the SME scheme.  That might be due to the higher rate of relief for the SME scheme, I'm not sure.

Capitalised expenditure - you're nearly right, but the capitalised expenditure still needs to be a qualifying category of expenditure.  Plant & machinery is not a qualifying category - unless it is actually a consumable/transformable item - if that's the case, it should not have been capitalised as a fixed asset in the accounts.  If it's a fixed asset, then you should claim RDAs limited to 100% of the expenditure.

Sorry but I don't know any good R&D books.... the HMRC manuals are quite good though.

Thanks (1)
By RandD
29th Apr 2012 21:58


The tripartite requirement was abolished for expenditure occurring on or after 1.4.2012. See here for details on all the 2012 changes.



Thanks (0)
By afairpo
02nd May 2012 18:06

Sub-contract costs (assuming that the sub-contractor is not a connected party) - you might be able to get more than 65% if:

(a) you can convince the sub-contractor to enter into a joint election for 'connected party' treatment AND

(b) their expenditure on qualifying costs in providing the service is more than 65% of the payment made to them.

The €7.5m limit is SME only - if you go over the limit, you should be able to claim the large company relief on the excess.  The limit is because the SME relief is a State Aid, and the EU doesn't particularly like unlimited State Aid.

Thanks (1)
By newmoon
to sigcima
04th May 2012 06:12

Thank you
Thanks to everyone for their replies and help.
Can I ask afairpo some clarifying questions regarding getting more than 65% on subcontractor costs please?
Does this apply to both the SME scheme and the Large Scheme?
If electing for 'connected party' treatment does the subcontractor need to be a limited company (I have a particular situation where some work is subcontracted to a partnership)?
If an 'elected party' election is made and it can be demonstrated what subcontract expenses are R&D (and what are not)can the R&D element be treated in the same way as other R&D expenditure as far as enhanced credit is concerned?
Presumably there is a reference for this information, but I haven't found it on the HMRC website.

Thanks (0)
By afairpo
04th May 2012 08:37

SME only, as large co relief v restricted
The election for connected party treatment is only applicable to the SME relief, as large company relief can be claimed on 100% of qualifying subcontractor payments - but remember that the large co relief is very restricted for subcontracted costs (only work subcontracted to universities and other qualifying bodies, individuals etc can be eligible - work subcontracted to UK companies is not eligible).

If an election is made, then SME R&D relief is given as usual on the lower of the payment to the subcontractor and the qualifying expenditure of the subcontractor. For the SME relief, the subcontractor can be anyone.

The rules are in ss1134-1136 CTA2009; the HMRC manual ref is CIRD84200.

Hope this all helps!

Thanks (1)
By newmoon
04th May 2012 09:39

That's really helpful.

That's really helpful, thank you.

Thanks (0)
By weaverc
15th Feb 2013 15:32

Subcontract- double counting?

Interesting posts.  Can I please ask a further question.  I have come across an SME that subcontracts to an unconnected large company to carry out R & D on their behalf.  the large company will have autonomy to tweak design as they see fit but the overall benefit of the design still sits with the SME.  The reward for the large company is in their fees only. 

I can see that the SME can make a claim, is there any way the large company can also make a claim here for the project work it is carrying out?  I know that in recent consultation, one worry of extending the subcontractor rules to allow a subcontractor to claim was that it could lead to double claims on the same expenditure.  I would assume claims by both parties are not possible.

Thanks (0)
Share this content