Can subcontractors claim Research & Development relief and R&D tax credits?
Yes, they can, but not in all circumstances, and I’ll outline some of the larger ones. The R&D tax relief is designed to reward risk, and it’s this that’s key to whether you can or not. There is also the HMRC definition of being a subcontractor to consider, and whether you are subcontracting or being subcontracted.
I’m subcontracting work out
If you are an SME, and you subcontract parts of your R&D project out then good news, you can claim some of the cost in your R&D claim. There is a limit of 65% of what the subcontracting cost you, so any eligible costs are only up to that point. If you are a Large Company you cannot claim your subcontracting costs.
I do work for other people
What if you consider yourself being a subcontractor? The definition of subcontracting is important here, and regardless of how you see yourself it’s how you fit to the legislation. HMRC define subcontracting as; “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 have been subcontracted.” So what does this mean to you? Let’s take a theoretical case. The company looking to claim is a design company, and they design all manner of parts for other companies, from creative designs to electronic engineering. Only some of these activities are eligible anyway (I’ll talk about that in another blog), but in this case what is critical is that this company is paid on a time and expenses basis, and so are clearly a subcontractor. They can’t claim under the SME scheme, as they are not taking any risk at all, despite some of their activities being difficult to do and potentially eligible.
Back to you - if you quote a fixed price to supply a challenging new product or solution that you haven’t made before, then you are taking a risk in doing so as it might be much more difficult than you thought, and take more time than you planned. In this scenario you are not a subcontractor, you are undertaking R&D yourselves and taking risk to develop that product or solution – you can most likely claim but we’d need more information to be certain.
I’m working for a Large Company
You might have noticed that I said that subcontractors “can’t claim under the SME scheme”. It is possible to claim under the Large Company scheme if you are being subcontracted to do the work by a Large Company itself. They can’t claim (see the first point) but if R&D is being carried out then you can potentially still benefit. The downside of this is that the Large Company scheme is at a far lower benefit level than the SME scheme (see here for a bit more detail), the upside is that a claim can be made.
Is that all?
There are other potential pitfalls that you need to be aware of, like the use of technical consultants on your R&D and what that means to your claim, but hopefully this blog will help you decide whether you want to look further into doing an R&D claim or not, and who to ask about the extra detail you need.
0115 824 0402
SME –a Small to Medium sized Enterprise that is; less than 500 staff AND up to €100 m turnover OR up to €86 m balance sheet value
Enhancement values – when you worked out your profit you recorded your costs at what they cost you, 100%. For SMEs you can add another 130% to your R&D costs, and for Large Companies an extra 30%. These act to reduce your taxable profit and save you tax