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By victoria Taylor

R and D claims are the UK government scheme, which works according to the HMRC guidelines. HMRC requires you to follow these regulations for preparing successful R and D claims. These comprehensive guidelines also inculcate terms and conditions for qualifying projects and expenditures. In simple words, R and D claims can only be made for the projects seeking innovation and all the costs directly involved in research and development qualify for the claim. But these guidelines are not that straightforward, as these are constantly changing and are complex to understand without consulting R&D tax specialists. 

Can You Make R and D Claims for Subcontracted R&D Projects?

Subcontracted R&D is when a company subcontracts some parts of its research and development project to a third party. It is often done to access experience and knowledge to carry out your project.

Many companies are not aware that HMRC allows companies fulfilling other prerequisites of R and D claims, including the cost of subcontracted research and development projects under specific conditions. This blog will explain what subcontracted R&D means and how it impacts your R and D claims?

Things subcontracting company needs to consider while making R and D claims are:

  • Which scheme are you applying R and D claims through?
  • How are subcontractors and subcontracted companies connected?

What is Subcontracting R&D?

The eligibility of subcontracted R&D is dependent on the nature of the contract between the subcontractor and third party. Subcontracted R&D is when a contract is made for a part of research and development activities to be carried out by another party. The subcontracted part does not necessarily be the research or development of any product or service to qualify. Even if a small part of the project, like testing of creation, is subcontracted to some third party to access relevant testing equipment, it will be considered subcontracted work as it is still contributing to the whole R&D project.

Note: If a contract indicates providing service for the R&D project, even though it is helping in carrying out the R&D project, it can not be considered subcontracted R&D.

Can Subcontracting Company Make R and D Claims?

• Through SME Scheme:

HMRC allows subcontracting SME companies that are not connected, i.e. two companies that do not have the same shareholder making R and D claims to reclaim up to 65% of the qualifying subcontractor’s costs. The subcontracting company does not need to be UK based in order to qualify for the claim, and similarly, HMRC doesn’t restrict qualifying activities to take place in the UK. Subcontracted part of R&D can take place anywhere in the world and still qualify for the claims.  

• Through RDEC Scheme:

HMRC does not allow large companies to make R and D claims for their project subcontracted to any limited company. According to HMRC guidelines, large companies can claim part of the R&D project subcontracted to any qualifying body, charity, scientific research organisation, individual workers, health service bodies, and education institutions.

• Connected Companies

HMRC does not allow large companies to make R and D claims for their project subcontracted to any limited company. According to HMRC guidelines, large companies can claim part of the R&D project subcontracted to any qualifying body, charity, scientific research organisation, individual workers, health service bodies, and education institutions.

If two companies have the same shareholder, they are termed ‘connected’. If any SME undertakes subcontracted tasks by a connected company, it is not allowed to claim 65% of the subcontracted cost. 

On the other hand, the large companies are not allowed to include subcontracted expenses made to the connected company.

Note: Large companies can claim for the costs of externally provided workers.

Things to Remember:

While making an R and D claim for subcontracted R&D, make sure:

  • Subcontracted you have a contract with for the R&D project is paid for the part they carried out regardless of the results of your project.
  • That you provide a detailed outline of your R&D project, clearly and precisely indicating which part is subcontracted.
  • That your R&D claim states the nature of the contract between your company, subcontracted company, or any other eligible body.

Can Subcontracted Company Claim R&D Incentives?

The SME scheme restricts access to the R and D claims for the subcontracted companies. Therefore, all the SMEs and large companies that are subcontracted to perform part of an R&D project can not claim via the SME scheme, whereas HMRC allows them to access R&D incentives through the RDEC scheme.

R and D Claims Reforms

In the recently proposed changes in the R&D tax relief claims, the UK government proposed that if a company subcontracts a part of an R&D project, it will only be eligible if those activities are carried out within the UK. This means companies will no longer be able to claim for overseas subcontracted R&D activities under these proposed regulations.

If you want to know more about R and D claims, contact our R&D tax relief experts. The team of Square Finance is always ready to help businesses start their R&D tax credit claim process with our hassle-free and risk-free claiming process. We have years of experience in assisting businesses in receiving R&D incentives by detecting all qualifying projects and expenditures and preparing maximised claims for their companies. Contact us now and let our R&D experts manage your R and D claims.

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