In this article, discover whether you’re able to include subcontractor costs in your R&D claim and how this differs for SMEs and large companies.
Assess the relationship between the contractor and subcontractor
When making a claim, it is important to take into account the relationship between the subcontractor and the contractor, specifically where they are working to overcome uncertainty.
It is essential to make sure that the costs you’re including in your claim are qualifying R&D activities. To establish this, several factors should be considered:
Autonomy
The autonomy and supervision in the relationship between the contractor and the subcontractor is a crucial aspect. A low level of autonomy combined with high levels of supervision could indicate that the relationship should be classified as an externally provided worker, rather than a subcontractor.
Nevertheless, when an SME is subcontracting qualifying activities, the subcontractor must have a certain degree of autonomy to resolve uncertainties effectively.
Deliverables
When commissioning a specific part of an R&D project to a subcontractor, the deliverables must be carefully specified. It is important to have in-depth knowledge of the development area and to provide detailed specifications of the work that needs to be carried out.
Intellectual property (IP)
In most cases, when R&D is subcontracted, the intellectual property (IP) is expected to belong to the principal company. However, this is a complicated issue and cannot be conclusive when determining the nature of the relationship between the contractor and the subcontractor.
Risk
When it comes to subcontracted R&D, the subcontractor is typically compensated based on the success of the overall project, rather than on specific tasks or deliverables. As a result, any risks associated with the project’s success, including any failures or overruns, are generally handled by the principal company rather than the subcontractor.
Once you have assessed these criteria and determined that the subcontractor is performing qualifying R&D activities, you can include the subcontracted costs in the claim as an SME.
Subcontractor costs for the SME R&D tax credits scheme
In an SME R&D tax credit claim, the amount that can be claimed for subcontractors is subject to certain limitations. If the subcontractor is unconnected, you can claim up to 65% of the costs paid for R&D. However, if the subcontractor is connected, which means that the two companies are controlled by the same person or group, the claimable amount is restricted to whichever is lower between the R&D payment disbursed to the subcontractor and their related expenses.
Read our related article to find out more about connected subcontractors: Can You Claim Tax Credits When You Use R&D Subcontractors?
Subcontractor costs for the RDEC R&D tax credits scheme
The treatment of subcontractors in RDEC claims differs from the SME R&D tax credit scheme. Large companies can only claim subcontractor costs that are payments made to certain entities, such as an individual, charity, higher education institution, scientific research organisation, or health service body. If your subcontractor costs meet these criteria, you can include them in your RDEC claim.
However, note that a lot of contractual relationships you might consider to be subcontractors will actually be what the R&D schemes consider to be externally provided workers, and those costs are eligible for RDEC. The distinction is highly nuanced, however, so you need to examine each relationship carefully, and seek expert advice if you have large amounts at stake.
How Ayming can help
As Europe’s largest R&D tax adviser, we have the expertise to help you make the most of your R&D investment. We understand that processing and building an R&D claim can be a complicated and time-consuming process, which is where our team comes in.
Our team of technical experts will work with you to understand your business, goals, and objectives, as well as your R&D activities, to make sure you get the maximum benefit from your R&D claim.
Contact us to discover how we can help you streamline your R&D claim process and take advantage of all eligible R&D activities.