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HMRC internal manual

Corporate Intangibles Research and Development Manual

Patent Box: new regime: Terms of the R&D fraction : R&D subcontractor expenditure CTA10/s357BLC and BLD

S357BLC and BLD CTA10

There is no definition of ‘subcontracted’ within the legislation for R&D as each case is determined on its particular facts, with reference to the relevant guidance on categories of subcontracted activities. However, guidance to the meaning of subcontracted activities is covered at CIRD84250  and CTA10/S1133 defines “sub-contractor payment”. It covers a variety of contractual arrangements.


S1 is the company’s qualifying expenditure on relevant R&D sub-contracted to unconnected persons

S2 is the company’s qualifying expenditure on relevant R&D sub-contracted to connected persons


CTA10/S1122 defines “connected persons” for the purposes of qualifying sub-contracted expenditure. This applies regardless of whether the connected person is resident overseas or within the UK. More detailed guidance is at CIRD82150


Qualifying expenditure on relevant R&D is defined at CIRD274200.


Where the  expenditure to the subcontractor contains elements relating to work that is not relevant R&D, a reasonable apportionment should be made.


There is no restriction to 65% of subcontractor expenditure as with the SME R&D tax credit scheme.


Further information

  1. Foreign Permanent Establishments

Where a company has elected under S18A CTA2009 to exempt profits and losses arising in its foreign permanent establishments, any R&D expenditure undertaken in-house or subcontracted to unconnected persons by that branch, will be treated as expenditure subcontracted to connected persons i.e. “S2” in the R&D fraction, rather than “D” or “S1” respectively.



  1. Externally Provided Workers

When a company only has the role as the provider of individual services, such as staff, that company may not be classed as undertaking subcontracted R&D. It will depend on the wording of the contract and actual substantive activities of the company, but if staff costs fall within the definition of an Externally Provided Worker they could be counted in the fraction as in-house expenditure under D. They would need to substantively and contractually meet the qualifying conditions under the relevant heading CIRD83000  but if they do, external workers provided by a ‘connected’ company would be classed as direct qualifying expenditure rather than connected subcontractor payments.

  1. Pass Through Costs


Pass-through costs, which are expenses incurred by the subcontractor in respect of R&D undertaken by another party on behalf of the contractor, would be classed as a direct subcontracted cost. For example, where a Pharmaceutical company (contractor) contracts through a Contract Research Organisation (subcontractor) to conduct clinical trials, and the CRO makes payments to research sites and other vendors, these would be classed as a directly subcontracted R&D of the Pharmaceutical Company.

Where a contractor makes payments through a connected company to a third party subcontractor, provided the connected company only performs minimal administrative functions in relation to the contract or subcontract, these payments would also be included in qualifying expenditure as R&D subcontracted to unconnected persons in the fraction under S1. That is, as if the third party subcontractor had directly provided the services to the first company.

However, where the connected party owns the project or manages the R&D work which is simply recharged to the first company, then it would be classed within S2 related party subcontracting costs whether or not the R&D is performed in house or sub contracted further to either related or unrelated parties.

           4. Integrated payments made to connected party

            Where a service fee, profit element or other additional charge is included in the payment made to the subcontractor it is only necessary to include in the fraction term those costs which specifically relate to qualifying R&D expenditure.