Navigating R&D tax relief for subcontractors

Research and Development (R&D) Tax Relief is a powerful incentive for businesses engaged in innovative projects. Many companies, however, collaborate with subcontractors to bolster their R&D endeavours. Understanding the intricacies of claiming R&D Tax Relief for subcontracted work is crucial. In this guide, we’ll unravel the complexities and shed light on how businesses can leverage this incentive effectively.

Who Can Claim R&D Tax Relief for Subcontracted R&D?

Claiming R&D Tax Relief for subcontracted R&D work depends on three key factors:

• The Parties Involved: It hinges on whether your company subcontracted the work or if you were subcontracted by another business.
• Type of Scheme: The specific R&D Tax Relief scheme you and your subcontractor(s) are applying for plays a crucial role. This includes SME R&D Tax Relief and the Research and Development Expenditure Credit (RDEC).
• Connected Companies*: The relationship between the companies involved is vital. If they are controlled by the same shareholders, they are considered ‘connected.’

*Companies are considered ‘connected’ if they share the same shareholders. SMEs can claim for work subcontracted to a connected business, but the relief is calculated differently. Large companies, however, have more specific rules regarding claiming subcontractor costs.

Scenarios and Eligibility

Scenario 1: SME R&D Tax Relief for Subcontracting

• SMEs can claim relief on up to 65% of qualifying subcontractor costs, provided they are not ‘connected’.
• The subcontractor’s location (whether in the UK or overseas) is generally irrelevant, though there are considerations for expenditure after April 1, 2024.

Scenario 2: RDEC for Large Companies

• Large companies cannot claim R&D Tax Relief for subcontracted work to limited companies. However, they can claim relief for work subcontracted to specific entities like charities, research organisations, and more.

Scenario 3: SME R&D Tax Relief for Subcontractors

• SMEs cannot claim expenses associated with work subcontracted to them by another SME under the SME scheme. However, they can claim through the RDEC scheme if they’re the rightful claimant.

This is a very high level summary and does not cover all nuances. The eligibility of R&D is a very complex area, and this continues to evolve on a regular basis. It is imperative that any claimants seek individual expert advice prior to making a claim to ensure that they are eligible and meet the filing requirements.

Please contact Gina Gardner on gina.gardner@ballardsllp.com or call 01905 794 504.

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.