Claiming R&D tax credits on subcontractors
An SME carrying out research and development (R&D) will usually be able to claim 65% of the costs paid to any subcontractor for qualifying activities.
Subcontracted work on an R&D project is where you engage someone else to carry out R&D activity on your behalf in exchange for payment.
For R&D purposes, your subcontractor need not be UK-resident, and there is no requirement for the subcontracted R&D work to be performed in the UK. Additionally, the actual work carried out by the subcontractor need not be R&D itself when looked at in isolation. But it should form a component of your larger R&D project.
The subcontractor and contractor relationship
The nature of the relationship between the subcontractor and the contractor must be considered in your claim: i.e. Where is the work to overcome the uncertainty taking place? You must be careful that the costs you are claiming are in respect of qualifying R&D activities. When making this assessment, you should consider:
-In subcontracted R&D, the subcontractor is being paid for the outcome of the R&D, regardless of the project’s success. It is therefore expected that any failures or overruns would be incurred by the principal company rather than the subcontractor.
-You should be carrying out an R&D project and contracting out a specific part of that project to the subcontractor. It would therefore be expected that you are knowledgeable in the area of development and outline a detailed specification of the work to be carried out.
-If there is a very low level of autonomy and high level of supervision, the relationship may not be classified as subcontracting and in fact be considered as an externally provided worker. If an SME is subcontracting qualifying activities, they will have a vested interest in the R&D, but the subcontractor will enjoy a degree of autonomy in resolving the uncertainties.
-If your R&D is subcontracted it is generally expected that the IP will vest with the principal company. However, this can be complex area and is used as an indicator rather than being conclusive to the status of the relationship.
When you have considered these criteria and established that you, as an SME, are subcontracting qualifying R&D activity, then your subcontracted costs can be included in the claim.
How much to claim for subcontractors
You can claim up to 65% of the costs paid to a subcontractor for R&D if your subcontractor is unconnected. Connected parties are where two companies are controlled by the same person or in the same group. If you are connected, then the claim will be for the lesser of the R&D payment made to the subcontractor and the relevant expenditure of the subcontractor.
To maximise your R&D claim, please contact us.