Under the Merged Scheme, the rules around claiming for subcontractor costs have been simplified to some extent, which is great for advisers and claimants alike!
However, the change in rules has introduced a great deal of temporary complexity when it comes to assessing whether the subcontractor or customer can claim for a specific project, given that in some cases the rules would allow for ‘double-dipping’.
Under the old SME/RDEC scheme rules, the following situations were true:
These rules were designed to prevent two companies claiming for the same costs, and, by and large, they worked.
Under the new merged scheme rules, the situation is very different:
Where both companies are claiming under either the old rules or the new rules, it all hangs together and there’s no chance of double dipping. However, the problem arises where customers and subcontractors have different year ends, and thus one is claiming under the new rules while the other is still claiming under the old rules. This could mean that both are entitled to claim for the contracted-out R&D under their respective rules, and double dipping is a real danger.
The transitional provisions are described in detail in CIRD165000. A basic summary is that the company who would be entitled to claim the costs under the old rules can claim relief, and the company claiming under the new rules cannot. However, as with all things in R&D tax relief, it’s not really that simple!
Any company that has subcontracted R&D or carried out R&D as a subcontractors during the transitional period will have to establish:
All this information must then be examined to work out who can make the claim. Here are a couple of examples to illustrate how this might work.
Example 1: Company A’s accounting period runs from 1st March 2024 to 30th April 2025. Company B’s accounting period runs from 1st April 2024 to 31st March 2025. Both companies are SMEs. Company A contracts company B to carry out R&D on its behalf.
In this case, under the old rules Company A would claim for the costs of the R&D and Company B would not be able to claim as it is carrying out R&D on behalf of an SME. Under the new rules, Company A would also be able to claim as it initiated the R&D. The transitional rules have no effect here, and Company A claims for all of the R&D costs.
Example 2: Company A’s accounting period runs from 1st March 2024 to 28th February 2025. Company B’s accounting period runs from 1st April 2024 to 31st March 2025. Company A is a Large Company and Company B is an SME. Company A contracts company B to carry out R&D on its behalf.
In this case, under the old rules Company A would not be able to claim for the costs of the R&D because it is a LC, whereas Company B would be able to claim as it is carrying out R&D on behalf of a LC.
Under the new rules, Company A would be able to claim as it initiated the R&D, and Company B would not be able to claim.
The transitional rules take effect here, meaning that Company B can claim for the costs incurred in the period to 28th February 2025, as Company A will still be subject to the old rules. From 1st March 2025 Company A will be subject to the new rules and as such will be able to claim the costs of the R&D that it initiated.
As you can see, although the rules are fairly straightforward, how this is applied in real-life is complicated, especially when you consider that a company may have many subcontractors or customers with varying accounting periods, and this needs to be assessed individually for each.
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