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Is it possible to claim R&D tax credits on the costs of subcontractors?

Updated:
Published:
10 December 2022
Summary
Only revenue (not capital) costs are eligible for R&D tax credits. This article explains which categories qualify and how to calculate them, including staff, su
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Is it possible to claim R&D tax credits on the costs of subcontractors?

SMEs carrying out R&D can usually claim up to 65% of the costs paid to a subcontractor for qualifying R&D activities.

Subcontracted R&D is when you engage a third party to carry out R&D activity on your behalf. To be eligible, the subcontractor need not be UK-resident, and there is currently no requirement for the subcontracted R&D work to be carried out in the UK (though both of these rules may change in HMRC’s forthcoming legislation changes).

Different rules apply to companies who are accessing the R&D incentives through the RDEC scheme.

Eligibility and the subcontractor relationship

An R&D claim comprises costs pertaining to eligible activities, that is: those which seek to overcome an element of ‘scientific or technological uncertainty’. It is important that you consider where the cost-incurring onus is situated within the work to resolve this uncertainty. The costs you claim should only pertain to qualifying R&D activities; with subcontracted R&D the subcontractor is being paid for the outcome of the R&D so any failures or overruns should be demonstrably incurred by the contracting company, rather than the subcontractor. You should be confident in your ability to evidence this when making a claim.

What to consider when claiming subcontractor costs

As well as the associated financial risk, you might also want to consider:

  • A project’s deliverables
  • The subcontractor’s level of autonomy; and
  • Who owns the associated Intellectual property (IP)

If these factors have been carefully considered so as to conclude that the SME is indeed subcontracting its R&D, the associated costs are likely to be eligible for inclusion in an R&D tax-credit claim at 65%.

How can we help?

Book a free consultation with our expert R&D funding advisors today. We specialise in helping innovative businesses like yours unlock millions in government funding, specifically allocated to fuel your innovation. Let us help your business access the support it deserves.

Dr. Claire Flanagan

Grants Lead

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