Brought to you by
Randdlogo_aweb

R&D tax relief training and support

Save content
Have you found this content useful? Use the button above to save it to your profile.

Is subcontracting any simpler under the Merged R&D scheme?

5th Apr 2024
Brought to you by
Randdlogo_aweb

R&D tax relief training and support

Save content
Have you found this content useful? Use the button above to save it to your profile.

The rules for claiming subcontracted R&D have changed significantly under the new Merged R&D Scheme.

2 People agreeing to a deal
Canva

Recognising the contentious arguments around who could claim for subcontracted activities under the old SME Scheme, HMRC attempted to make this easier to define.

While many regard the changes as an improvement, there are still some uncertainties around how the rules will work in practice. While HMRC recently updated its guidance on contracting out R&D on 27th March, it is still labelled as ‘draft’. 

What we do know is that the ability to claim for subcontracted R&D activities is now down to who “intended or contemplated” that R&D was required, and this can be either the subcontractor or the customer. 
In determining whether they are able to make a claim, the onus is on the company to evaluate all the available evidence, not just what it says in the contract. This could the ownership of IP, which party bears the financial risk, the level of autonomy of the subcontractor – and much more.

Without all this evidence in the background, HMRC could overturn the claim on the basis that although they commissioned the work, they did not intend or contemplate (in sufficient detail) that R&D was required.

If you’d like some help in getting up to speed with the new rules, we’ve developed a free course, An Advisor’s Essential Guide to the Merged R&D Scheme. This not only covers subcontracting, but also the other key areas of change in the new scheme. Complex topics are broken down into a series of short, clear videos and quizzes that are easy to fit around your daily work.

So, how will these subcontracting rules work in practice?

When considering whether to claim for subcontracted activities in an R&D claim, there are a couple of scenarios to consider. The first is simple and relates to subcontracting routine tasks associated with the R&D. 

If your client has contracted out routine activities to support an R&D project, they can include 65% of the cost of those activities in their claim – assuming the contractor isn’t connected to your client. That’s easy enough. The contracted activities don’t contain any R&D when viewed in isolation, so there’s no possibility of the subcontractor being able to claim.

The second scenario extends to situations where the subcontracted activities do constitute or contain an element of R&D. This is where “intent” comes into play. Who originally recognised the need for these R&D activities – the party paying for the work, or the party conducting it?

A simple enough question – but what evidence is there to prove it either way? That’s the tricky part. HMRC says that contracts alone aren’t enough, so what else does the client have to show that they not only intended to do R&D, but had a clear grasp on the detail of what was required? 

To claim the R&D, the company should ideally have Competent Professionals who are able to talk knowledgeably about the scientific issues and principles involved in the work. A vague “Yeah, we thought R&D was probably needed” isn’t going to cut it with HMRC.

So, even on paper things don’t seem that simple, and in practice the process of claiming for subcontracted R&D could be more challenging than you might think. And this is only one of many areas of change in the new scheme. For more information about another change encompassed by the new Merged R&D Scheme, read our previous article in the series: Grants and subsidies come with less baggage in new R&D Schemes