This issue revolves around the conditions for qualifying expenditure expressed in s1052(5) CTA 2009. To qualify as in-house direct R&D, the expenditure must not be incurred by the company in question on activities which are contracted out to the company.
If the R&D activity has been contracted out to the company by someone else then the company cannot include expenditure on that activity in its SME R&D claim. The difficulty, however, is around what exactly is meant by ‘contracted out’, as there is no definition of the term in the legislation.
For me the term ‘contracted out’, as used in the legislation, is a proactive term. The R&D activity is contracted ‘out’ rather than ‘in’, so it is something actively undertaken by the principal.
In order for A to ‘contract out’ an activity to B, I believe it must inevitably be necessary for A to know and intend such a thing to happen. In my experience (and I am not alone here) this has always been the position adopted by HMRC in the past.
Now we are told by HMRC that if company B has to undertake an R&D project in order to fulfil the terms of its contract with company A, and it was clear to the competent professionals employed by company B that R&D would be needed in order to do so, those activities have been contracted to it.
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I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on areas such as R&D tax relief, Patent Box and Creative Industry reliefs, as well as IP tax issues more generally.
Formerly a Tax Partner with KPMG LLP (UK), I left in 2011 to establish Aiglon Consulting.