This article looks again at the new rules around contracting out R&D which apply as part of the merging of the SME (Small & Medium Enterprise) R&D Tax Relief and RDEC (Research & Development Expenditure Credit) schemes. I wrote about this change in May, but I revisit it again here as it’s arguably the most extensive and complex change, with both positive and negative impacts depending on what commercial relations are in place.
The new rules determine which company in a commercial chain can claim R&D tax relief.
It is very important for anyone involved in a contract, either upstream with a client or downstream with a contractor to understand the new rules and review any implications for their potential to claim R&D incentives.
SMEs that don’t take heed of the new rules, may suddenly find they can no longer include a portion of their sub-contractor costs in their R&D claims.
The new rules already apply for some companies, as they take effect for accounting periods starting on or after 1 April 2024.
Main Change
The main change is that the right to claim R&D tax relief is assigned to the company taking the decision to undertake R&D. The aim of this is to encourage innovation by tying tax relief to companies that independently choose to invest in R&D.
The new rules will have a different impact on companies that have been claiming under the SME R&D tax relief scheme from the impact on large companies claiming under RDEC, but both could be impacted so both need to understand the changes.
Customer-Led R&D
Under the old rules SME claimants are usually barred from including costs of R&D covered by a commercial customer contract, as that R&D cost is deemed to be subsidised by the contract and therefore ineligible. On the other hand the old rules permit SME claimants to claim a portion of their costs as a customer hiring external contractors to undertake R&D activities on their behalf.
Conversely, under the old rules, in the main large companies, claiming under RDEC, cannot claim their costs spent on hiring external contractors to undertake R&D. But they are permitted to claim any R&D undertaken in house, regardless of any relevant contracts where they are the contractor for another large company.
Under new rules all the above scenarios have changed so what you did before may not apply going forward.
It is now the company that contemplates, intends and specifies the R&D that has the right to make the R&D claim, regardless of whether they are a large company or an SME and regardless of whether the R&D is being subsidised by a customer contract or grant funding, or not.
Which company contemplated and intended the R&D will be determined based on evidence. In particular, a company that wants to claim for R&D expenditure on work it contracted out to a third party will need to be able to demonstrate that:
- There was a contract between itself and it contractor/s.
- Qualifying R&D was undertaken to meet the obligations of the contract.
- Finally, assuming the first two tests are met, it contemplated and intended that R&D would be undertaken as part of the contract.
If these three conditions cannot be met, the contractor and not the customer that let the contact, will be the party that has the right to make an R&D tax relief or tax credit claim.
Read more on the details and view a video that outlines the changes at: https://www.randdtax.co.uk/attention-new-rules-for-claiming-rd-expenditure-credit-on-contracted-out-rd/
Author: Linda Eziquiel, Regional Director, RandDTax
1 thought on “New Contracted Out R&D Rules – Reminder: have you checked whether your R&D costs will still qualify?”
Thanks for the article! These RD cost tips are highly appreciated for my own tax planning UK business.