If so, you may not be able to claim R&D tax relief on this, even if you have done so in the past.

What is the rule on subcontracted R&D?

The relevant legislation here is the Corporation Tax Act 2009 (CTA2009), section 1052 (5) which states, among other things, that in-house direct R&D expenditure is allowable under the R&D SME scheme as long as “expenditure is not incurred by the company in carrying on activities which are contracted out to the company by any person.”

This means that it is very important to understand whether activities have been subcontracted to you as, if they have, a claim for these activities cannot be made under the SME scheme.  It is sometimes possible to claim for these activities under the RDEC scheme but the benefit will be much less.

What’s the point of this rule?

The main reason for this rule is to stop multiple companies from claiming for the same R&D costs.  When more than one party is involved in R&D, the relationships must be clearly reviewed to ensure that multiple companies aren’t claiming for the same costs.  For example, we wouldn’t want Company A to claim for undertaking R&D work which they subsequently charge Company B for and then company B claiming as well.

This is different to a joint project where Company A and Company B have their own separate costs, in which case both companies can usually claim for the same project.

What is subcontracted R&D anyway?

This very much depends on how HMRC is interpreting the above legislation which can change over time.  Until mid to late 2021, the Corporate Intangibles Research and Development Manual (CIRD) stated that “each case will need to be judged on its particular facts. As part of any examination it may be useful to examine the degree of autonomy enjoyed by the person engaged, the ownership of intellectual property, and the economic risk in any arrangements”.

This seems like a very reasonable approach but unfortunately, HMRC doesn’t appear to be taking it anymore and have updated CIRD to remove this paragraph, instead focusing on the part which states: “Any activities carried out in order to fulfil the terms of a contract are considered to have been contracted to the company”.

How do we know what HMRC’s current understanding of the legislation is?

The previously mentioned CIRD is the main resource although there is much in this that is open to interpretation.

The Research and Development Communication Forum (RDCF) meetings are generally very interesting meetings but are held bi-annually and can be quite slow moving if there are a lot of questions.

Conversations with those within HMRC can be very useful too although this is getting increasingly difficult – years ago it used to be possible to call HMRC and speak to an inspector but this is near impossible nowadays.   Even enquiries are now often handled by caseworkers who do not have the experience to debate the nuances of the legislation in relation to a specific scenario.

How is it fair that HMRC seems to be able to move the goalposts?

Let’s be honest, one sentence in the CTA2009 cannot adequately cover the dozens, if not hundreds, of scenarios which can occur in the real world, therefore, HMRC must do its best to interpret the legislation in a way that is fair to all.

However, as soon as there is clarity over HMRC’s understanding then there are those that will hunt for loopholes to allow them to claim for costs which are ‘technically’ allowable but not really in-fitting with the spirit of the scheme.   Therefore, HMRC must review it’s understanding of the legislation in order to close such loopholes.

The current issue is that there are so many people taking advantage of this R&D scheme that various measures are being put into place in order to tidy up the landscape but in many cases, genuine claimants are being unfairly penalised.

In addition, HMRC has taken on a lot of extra staff who all need to be trained up quickly – it’s not feasible to let them use their initiative on a case-by-case basis and so blanket policies are being applied, even if in some case no-body at all can claim for qualifying R&D activity.

If you have any questions on this blog or anything R&D related, please contact us at [email protected].

Posted: 28 Feb 2023