Contracted-out R&D and the merged R&D tax relief schemes: what you need to know

Here at WhisperClaims, our support team answers questions from our clients on all sorts of topics related to R&D tax relief. From this, we know that at the moment, the contracted out R&D rules for the new merged schemes are causing a lot of confusion. To help with this, here’s our guide to claiming contracted out R&D costs under the new rules:

Who can claim?

Under the old RDEC and SME schemes, working out who owns R&D work that has been subcontracted out from one company to another was always one of the trickier aspects of preparing claims, and even with recent updates, remains somewhat opaque. In addition, the rules around subcontracted R&D were different for each scheme. It depended on the size of the company subcontracting the work; and affected which scheme a project is claimed through.

Under the new RDEC and ERIS schemes, the rules are the same for all companies, regardless of which scheme the costs are claimed under. HMRC have also clarified which party can claim for contracted-out R&D, and it all comes down to two main factors:

who initiated the R&D, and

who was aware of the need for the R&D to be undertaken.

In any arrangement, HMRC expects that the projects will be included in the RDEC and/or ERIS scheme claim for the company that ‘takes the decision to undertake or initiate R&D’. This means that a company can claim for R&D contracted out by them to a third party if:

They enter into a contract for activities to be done for them;

The activities done to meet the contract include R&D and;

It is reasonable to assume that they intended R&D of the sort to be carried out when entering into the contract.

Conversely, a company can claim for R&D done to fulfil a contract if:

They took the initiative to undertake the R&D;

The company contracting out the work did not intend for (or know about) R&D to be done to fulfil the contract and;

The work meets HMRC’s criteria for eligible R&D.

How are contracted out R&D costs claimed?

Since the introduction of the Additional Information Form, and now the merged schemes, the amount of information that HMRC requires about subcontractors has increased significantly. In addition, under the new schemes, subcontractor costs are affected by the restrictions on overseas costs.

Under the old SME scheme, any subcontractor costs related to the resolving of technological uncertainties could be included in a claim for R&D tax relief. For RDEC claims, only costs of subcontractors that were not limited companies could be included. In both cases, the only information required by HMRC was the overall qualifying expenditure.

Under the new RDEC and ERIS schemes, contracted out R&D costs are allowable for all companies, and the rules are the same for both schemes. HMRC asks for the following information about each subcontractor:

Whether any of the qualifying expenditure was for overseas activity, and, if so, how much

If the overseas subcontractor costs are exempt from the overseas restrictions, and, if so, why they are exempt

How many of the subcontractors are companies

For each company subcontractor:

Registered country

Company registration number

Qualifying expenditure

This means that for each and every subcontractor used for the R&D projects, you’ll need to ask about:

what type of entity they are,

their registered location and registration number, and,

for any R&D carried out overseas by subcontractors, why the claimant feels that the subcontractor is exempt from the overseas restrictions.

You can find more details about the overseas restrictions here .

What if the information can’t be provided?

If the claimant company can’t provide company details or reasons that the subcontractors are exempt from overseas restrictions for the subcontractors alongside their costs and R&D apportionments, then the subcontractor costs cannot be included in a claim for R&D tax relief. For this reason, it is imperative that advisers update their processes to make sure that this information is gathered alongside the rest of the costs data, and only eligible subcontractors are included in a claim.

Summary

In summary, the new RDEC and ERIS schemes place greater scrutiny on contracted out R&D costs. Ensuring you have all the necessary details at the time of preparing the claim will help avoid delays and potential rejections from HMRC.

We covered subcontracted R&D, overseas costs and EPWs in our recent webinar, which you can watch on demand here.

And, if your firm would benefit from a structured, evidence-led process for subcontracted R&D and overseas cost rules, WhisperClaims provides guided workflows, risk reviews and expert support to help you and your team prepare robust claims with confidence.

Book a demo to see how it works.

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