The issue of subcontractors and R&D tax relief is one that causes a lot more uncertainty than it needs to. A lot of SMEs mistakenly believe that they either can’t claim R&D tax relief for projects that have involved subcontractors, or even that the subcontractors are the ones entitled to the incentive from HMRC. However, the answer is, in fact, quite straightforward…

 

Can I claim R&D tax relief on subcontractor costs?

Yes, businesses are fully entitled to claim R&D tax relief on the cost of engaging a subcontractor.

Subcontractor fees are listed as an ‘allowable expense’ by HMRC. This means that they can be considered part of the financial cost of research and development. However, you can’t claim the entire cost: SMEs can claim up to 65% of the cost of hiring a subcontractor for R&D.

 

I used a subcontractor to complete the 'research and development' part of a project: who can claim for R&D tax relief, my business or theirs?

This is a query we're often faced with, sometimes resulting in disappointed subcontractors.

In HMRC's eyes, the business that 'owns' the R&D (and is therefore entitled to claim the benefit of R&D tax relief) is the business that takes the risk.

Think of it this way: if your company is using a subcontractor to try to come up with an innovative solution or product, the outcome of the project doesn't matter too much to the subcontractor since you're going to pay them anyway.

R&D tax relief is designed to reward innovative risk-taking. If your company is responsible for the ‘risk’ associated with a project, it is your company that is eligible for the R&D tax relief.

 

Anything else to bear in mind?

We have seen disputes emerge between subcontractors and the businesses that engaged them about who is eligible for the R&D tax relief. Although HMRC's position is clear (see above), that doesn't necessarily stop costly and time-consuming disagreements over the matter.

We encourage all our clients to ensure that their contracts between subcontractors and themselves include clear guidance on the ownership of any IP. While this doesn't actually change anything (since legally and in the eyes of the law, R&D IP is the property of the contracting party), putting it in black and white ensures everyone knows where they stand.

In some cases, it's not always this straightforward about who's responsible for the R&D elements. Working with an experienced R&D tax relief advisor will give you the best chance of success. They know what they're looking out for, so it's easy for them to prove to HMRC which elements were R&D, and who's responsible for them.

Want to find out more about how subcontractors affect R&D tax relief? Get in touch with one of our specialist tax advisers.