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Subcontracted R&D: All You Need to Know

Subcontracted R&D serves as a strategic option for companies looking to enhance their research capabilities by involving external experts or entities.

Understanding how subcontracted R&D fits into tax relief schemes is essential for businesses aiming to optimize their financial approaches while fostering innovation. Submitting an R&D tax claim as an in-house cost when it was in fact subcontracted is one of the biggest mistakes often seen for R&D tax claims.

We will explore the specific features of Subcontracted R&D within various tax relief frameworks, highlighting important factors for both Small and Medium-sized Enterprises (SMEs) and larger corporations. 

From qualifying criteria to financial implications, our goal is to equip you with the knowledge to make well-informed decisions about utilizing subcontracted R&D to propel your business growth.

Enquire about an R&D tax credit loan here

The Difference Between RDEC Subcontractor Costs and SME R&D Subcontractor Costs

SME Subcontracted R&D Tax Relief:

For SMEs, subcontracted R&D tax relief is a way to incentivize innovation for small companies. Qualifying SMEs can claim relief on payments made to subcontractors who contribute to their R&D projects. 

This allows smaller companies to access specialized skills and resources.

SMEs can typically seek reimbursement for up to 65% of the payments made to subcontractors, provided the subcontractor maintains no connection with the company. 

However, if there is a connection, such as shared shareholders, the claim will be based on the lesser of either:

  1. The Eligible Expenditure of the Contractor: the expenses incurred directly by the subcontractor for the R&D activities. These expenses include labour, materials, and other costs directly associated with the R&D project.
  2. R&D Payment Made to the Subcontractor: the actual sum paid by the company contracting the subcontractor for the R&D services. It includes the payment made to the subcontractor for their contributions to the R&D project.

SMEs can include payments for various activities, such as staffing costs, externally provided workers, and consumable items directly related to subcontracted R&D.

RDEC Subcontracted R&D Tax Relief:

RDEC, on the other hand, is designed for larger companies and is structured differently to accommodate the scale of their operations.

Unlike SMEs, large companies can only use subcontractors that are individuals, a partnership of individuals, or a qualifying body for the expenditure to qualify.

RDEC allows large companies to claim 100% of R&D tax credit for certain subcontracted R&D expenses.

After April 2023, large companies cannot claim subcontracted R&D tax credits for activities that happened abroad, however this excludes activities where required factors such as geography, environment, population or other conditions that are not present in the UK. This could include factor such as deep ocean research, or legal requirements surrounding the work that needs to be undertaken.

The New Guidance for R&D Subcontractor Costs from HMRC in 2023

From 2024, under the new merged scheme, in cases where R&D is conducted under a contract, the new R&D expenditure credit and the increased support for loss-making R&D intensive SMEs as of April 2024 allow the customer to claim for R&D that has been contracted out, with some exceptions. 

R&D is considered contracted out when it is reasonable to assume that the customer intended or anticipated this type of R&D. This could cover an entire commercial project, a full R&D project, or aspects of an R&D project, with the rules applying equally to all scenarios. 

However, if a company contracted to work for a customer conducts related R&D and it’s not reasonable to assume the customer intended or anticipated such R&D, then the contractor can claim for it, provided they meet other relief rules. This isn’t R&D contracted to the company under the new rules because the decision to initiate the R&D is made by the contractor.

The updated legislation, CTA09/1133, defines when R&D is contracted out or not, affecting sections 1042D, 1042E, 1042F, 1052, 1053, and 1053A, which outline what expenses a company can claim.

There are instances where the contractor can make a claim even if the conditions of CTA09/1133 wouldn’t normally be met, like when the customer isn’t a UK taxpayer and therefore couldn’t make a claim themselves. These cases are explained further in section 7.5 and below. Understanding CTA09/1133 is crucial for determining who can make a claim in a given situation and to prevent double claiming.

The Difference Between Subcontracted R&D and Subsidised R&D

Subcontracted R&D:

  • Subcontracted R&D occurs when a company hires an external entity, known as a subcontractor, to perform specific research and development activities on its behalf.
  • The subcontractor is responsible for carrying out tasks related to the company’s R&D projects, contributing specialized skills or expertise to a particular aspect of the research.
  • The company pays the subcontractor for the services rendered, and these payments may be eligible for subcontractors R&D tax relief, particularly for SMEs. The subcontractor may or may not be connected to the hiring company.


Subsidized R&D:

  • Subsidized R&D involves a situation where external funding or financial support is provided to a company to facilitate its research and development activities.
  • The support can come in various forms, such as grants, loans, or other financial incentives, and it aims to encourage and assist the company in pursuing innovative projects.
  • Unlike subcontracted R&D, where the company pays the subcontractor for services, in subsidized R&D, the financial support is usually provided to the company directly or indirectly by a third party, such as a government agency or a private organization.


Key Difference:

  • In subcontracted R&D, the company pays an external entity for services related to R&D.
  • In subsidized R&D, the company receives financial support from an external source to help fund its own R&D activities.

Why an R&D Tax Credit Loan for your Subcontracted R&D Improves the Cashflow of Your Business

An R&D tax credit loan for subcontracted R&D can significantly improve the cash flow of a business by providing the funds sooner. When a company engages in research and development activities that involve subcontractors, it often incurs costs upfront. These costs can strain the company’s cash reserves.

The R&D tax credit loan acts as a financial bridge, allowing the business to access the anticipated tax credits associated with their R&D expenditures before the actual tax relief is received. 

This early capital enables the company to cover immediate expenses, settle payments with subcontractors, and invest in ongoing R&D projects without waiting for the typical tax credit processing timeline.

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