Assuming that you have identified that your company is carrying out qualifying activities for an R&D tax credit claim – it’s important to compile the correct R&D costs for your R&D projects. Our experience is that errors frequently occur in respect of the handing of subcontracted R&D costs.
Failing to handle subcontractor costs correctly, when compiling your R&D tax credit and relief claim, will put your company at risk of an adverse HMRC enquiry.
Here are a few pointers to help you consider what the issues are:
- There are two R&D tax credit/relief schemes – Research and Development Expenditure Credit (RDEC) for large companies with over 500 employees; SME R&D Tax Relief for small companies (Small & Medium Enterprises). The rules on claiming cost for subcontractors differ for RDEC and SME claims. In general only SMEs can include Subcontractor costs in their R&D claims.
Identifying a subcontract relationship
- Where there is a contract between persons for R&D activities to be carried out by one for the other, then the R&D activities are considered to have been subcontracted. Where there is no written contact and sometimes even where there is a written agreement: a) determining whether a subcontract relationship exists; and b) whether the subcontracted activities qualify as R&D, can be complex – government guidance CIRD84200 and CIRD84250 go into more detail on this including, the meaning of subcontracted for R&D tax credit and relief claims.
- Where there are activities being subcontracted, SMEs can include either 100% or 65% of the relevant costs in using subcontractors to carry out qualifying R&D activities. The percentage that applies depends on whether the subcontractor is deemed to be connected to the company making the R&D claims or not (if connected 100% applies, if no connection 65% applies). Determining whether there is a connection or not can be complex, so if you are in any doubt it is best to seek specialist advice.
- It’s important not to confuse contracts for the provision of Externally Provided Workers (EPW) such as agency staff with subcontracts. Read more about Claiming R&D Tax Credits on Externally Provided Workers and Agency Staff.
Subcontracting self-employed persons – new tighter rules from April 1 2020
- Self-employed persons may be classified as subcontractors but a number of factors need to be considered to determine if the relationship is actually one of subcontracting or alternatively employment under IR35 rules. It’s essential to get this right not just for your R&D claims but for your business as a whole. It is a ‘hot’ topic for HMRC with new IR35 rules coming into effect for the Private Sector on the 1st of April 2020 (these rules have applied to the public sector for the last two years).
For more information on claiming R&D tax credit and relief please contact us
Linda Eziquiel, Regional Director