Key Takeaways
- Small and Medium Enterprises (SMEs) can claim up to 65% of R&D subcontractor costs, subject to qualifying criteria.
- Relationship aspects like risk, deliverables, autonomy, and IP rights are significant in determining the nature of subcontractor costs.
- R&D tax relief rules differ between the SME scheme and the Research and Development Expenditure Credit (RDEC) scheme, requiring careful assessment.
- Legislation changes, including the reintroduction of PAYE/NIC cap, may impact R&D tax credit claims.
R&D Subcontracting: The Basics
Subcontracted work on a Research and Development (R&D) project involves assigning R&D activities to an external entity in exchange for payment. An SME conducting R&D can claim tax relief on 65% of the costs paid to any subcontractor for qualifying activities. For companies falling under the RDEC scheme, the subcontractor must be an individual, partnership of individuals, or a qualifying body. It is crucial to consider the contractor-subcontractor relationship nature, including the risk, deliverables, autonomy, and Intellectual Property (IP) rights. Once the qualifying R&D activity has been established, SMEs can include subcontracted costs in the claim.
It’s worth noting that the subcontracted R&D work need not be performed in the UK, and the subcontractor need not be UK-resident. Moreover, the work done by the subcontractor may not necessarily be R&D in isolation, but should form part of the larger R&D project. ForrestBrown
Deciphering Subcontractor Costs in SME R&D Tax Credit Claims
An SME can claim up to 65% of the costs paid to an unconnected subcontractor for R&D activities. Connected parties refer to companies controlled by the same group or person. For connected entities, the claim will be for the lesser of the R&D payment made to the subcontractor and the relevant subcontractor’s expenditure. However, to prevent the abuse of the SME payable R&D tax credit, the government will reintroduce a PAYE and NIC cap on the SME payable credit. This, initially planned for April 2020, has been postponed to allow further consultation on the cap’s design. GrantTree
Subcontractor Costs in RDEC Claims
Large companies claiming under the RDEC scheme can only claim subcontractor costs if payments are made to an individual, a partnership of individuals, or a qualifying body such as a charity, higher education institute, scientific research organisation, or health service body. If you meet this definition, you can include 100% of your expenditure in your RDEC claim. R&D Tax Solutions
Understanding Subcontracted Activities in Detail
The subcontracted R&D must be directly undertaken on behalf of the company. The subcontractor must do the work, and not further subcontract it to a third party, unless the parties are unconnected, and the claim is made under the SME scheme. HMRC
Table 1: Comparison of Subcontractor Cost Claims Between SME Scheme and RDEC
| SME Scheme | RDEC Scheme | |
|---|---|---|
| Eligibility | Any subcontractor | Individual, partnership of individuals, qualifying bodies |
| Claimable cost | Up to 65% | 100% |
| Condition | Activities must be part of the company’s R&D, no requirement for the subcontracted R&D to be performed in the UK | Payment must be made to eligible entities, no further subcontracting allowed unless for SMEs |
Table 2: Key Factors Determining Subcontractor-Contractor Relationship
| Factor | Description |
|---|---|
| Risk | The subcontractor is paid regardless of the project’s success. Any overruns or failures are incurred by the principal company |
| Deliverables | The contractor should have a detailed specification of the work to be carried out and be knowledgeable in the area of development |
| Autonomy | A high degree of supervision and low autonomy may classify the relationship as externally provided workers rather than subcontracting |
| IP Rights | If R&D is subcontracted, the IP generally vests with the principal company, although this is not always the case |
By understanding and leveraging the nuances of R&D subcontracting, UK startups can maximise their tax relief and reduce their overall R&D costs. Remember to consider the nature of the contractor-subcontractor relationship, the risk, deliverables, autonomy, and Intellectual Property (IP) rights. These critical factors determine how you navigate the landscape of R&D tax relief and subcontracting for maximum financial benefit.
Understanding the varying nuances between the SME scheme and the RDEC scheme is critical, especially considering the eligibility requirements and differing claimable costs. Keeping an eye on legislative changes, such as the reintroduction of the PAYE/NIC cap, can help plan and optimise your claims.
Through careful planning and consideration, UK startups can make the most of the R&D tax relief schemes, ensuring innovation continues to be at the forefront of their strategies.
Disclaimer
This article is informational and should not replace legal or financial advice from professionals. Please consult with an advisor for specific situations.
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