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Subcontracted R&D Tax Relief Guide for SMEs & Large Companies

Outsourced research and development can boost your R&D tax credit claim, but how does it work? We cover all this and more in our guide to subcontracted R&D. Learn whether your SME or large company can claim, how the merged scheme may affect subcontracted R&D claims, the eligibility criteria for R&D activities, and even get visual aid on the latest HMRC policies.

For many businesses, there may come a time in their research and development project when there is a necessity to outsource specific activities. These expenses can present for some, as a financial burden — that is unless they have a plan to claim R&D tax credits.

As an initiative formed by the British government, the R&D tax credit relief has a wide range of criteria that businesses must adhere to. In our mission to simplify the R&D claims process, we’ve compiled all of the relevant information on outsourced R&D to help you prepare for your future successful claim.

What is Subcontracted R&D?

When an individual, business or organisation is outsourced to complete research and development activities, it’s known as subcontracted R&D.

While the subcontractor carries out specific tasks, the contracting company retains control over the research and development project. These tasks may include:

Developing new products

Carrying out research

Constructing new processes

Forming new technologies

For some businesses, the costs incurred as a result of outsourcing research and development activities may open the doors to additional financial resources in the form of R&D tax credit relief. Similarly, those contracted to carry out research and development activities may benefit from the relief, contingent on the contracting party.

Subcontracted R&D Under the SME Scheme

When it comes to subcontracted R&D as an SME (small and medium sized enterprise), claiming R&D tax credits can come with contingencies.

Provided they are the contracting party, SMEs can benefit from R&D tax credits under the SME scheme when they outsource research and development activities to:

Other SMEs

Large companies

Qualifying bodies

As a subcontractor however, SMEs cannot claim the tax relief under the SME scheme. Instead they must claim incurred costs under the RDEC scheme — but even that provides limitations.

The following is a visual example of subcontracted R&D for SMEs:

Subcontracted R&D Under RDEC

SMEs looking to claim R&D tax credits as a subcontractor under RDEC, can only do so if they have incurred qualifying research and development costs for activities performed for large companies.

For large companies, subcontracted R&D under RDEC is more straightforward, due to the fact that large companies can only claim as a subcontractor if they are outsourced by another large company or by a group company.

As a contracting company, large companies can claim the costs incurred by outsourcing research and development activities to an individual, a group of individuals, or a qualifying body such as:

A charity

A higher education institution

A scientific research organisation

A health service body

The following is a visual example of subcontracted R&D for large companies:

How the Merged Scheme Impacts Subcontracted R&D

Subcontracted R&D under the merged scheme changes the eligibility criteria for both SMEs and large companies. These criteria specify that subcontracting costs will only be eligible for R&D tax credit relief if:

If they undergo independent R&D outside the parameters of their contract

If the contractor didn’t believe R&D to be necessary but the subcontractor does

If the contracting company isn’t based in the UK

If the contractor is a non taxable entity (such as a charity)

In order to determine eligibility for R&D tax credits as a subcontractor under the merged scheme, it’s important to follow these steps:

Identify qualifying activities

Determine qualifying expenditure

Gather necessary documents

Calculate the total expenditure of your claim (use our R&D tax credit calculator)

FAQs

We want to ensure that you have all the relevant information about subcontracted R&D so that you may plan ahead for future research and development projects. So we’ve taken the time to ask our specialists some of your most frequently asked questions, in order to get you all the information you need to maximise your future claims.

What’s the Rate of Subcontracted R&D?

Under both the SME scheme and RDEC, the current rate for subcontracted R&D is 65%, meaning businesses may claim that percentage of costs incurred by outsourced research and development.

The merged scheme upholds the rates of RDEC and the SME scheme, meaning that those claiming subcontracted costs prior to April 1st 2024 will be able to receive up to 65% of the incurred costs.

How Does Ownership of Intellectual Property Impact Subcontracted R&D Tax Credits?

Ownership of intellectual property (IP) is important when it comes to subcontracted R&D, as to be eligible for R&D tax relief under the merged scheme, claimants must either possess the IP or the rights to exploit it. Without ownership or rights, subcontracted R&D costs may not qualify.

How Can I Optimise My Subcontracted R&D Strategy for R&D Tax Credits?

In order to form an optimised R&D strategy that allows you to maximise your R&D claim, we recommend that you follow these steps:

Secure ownership or exploitation rights through legally binding contracts

Carefully select experienced partners

Maintain meticulous documentation

Balance outsourced research and development with outsourced

Stay updated with the latest HMRC legislation

Collaborate with R&D tax credit specialist

How Alexander Clifford Can Help

Our leading team of R&D specialists dedicate themselves to understanding the ins and outs of the R&D tax credits system. Using their expertise, they’ve collaborated with clients in order to compile and submit over 2,400 claims, and they’ve done it with a 100% success rate.

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