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%.
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