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CIRD84250 - R&D tax relief: categories of qualifying expenditure: subcontracted activities - meaning of subcontracted

SME Scheme, Activities contracted to the SME – ss 1052(5) & 1053(4) CTA09

Expenditure incurred by a company in carrying out activities contracted to it by another person is not qualifying expenditure. This is intended to prevent both parties to a contract from claiming relief for the same activities.

Whether the activities were contracted to the company is a question of fact and each case should be looked at individually. Any activities carried out in order to fulfil the terms of a contract are considered to have been contracted to the company. However, where a company continues to conduct relevant R&D after the contract has been fulfilled, those post-contract activities will not be considered to have been contracted to the company.

SME Scheme, Activities contracted out by the SME 1053 CTA09

Where there is a contract between persons for activities to be carried out by one for the other, and those activities form the whole of an R&D project or are part of a wider R&D project, then R&D activities have been subcontracted. A contract to provide services other than a specific part of those activities is not subcontracted R&D. Nor is a contract of personal employment.

There are obviously a considerable variety of possible contractual arrangements. The following examples illustrate a range of situations, but they are not exhaustive and each case will need to be judged on its particular merits.

  • Where a company carries out R&D on its own account and simply receives a subsidy from another entity, this is not subcontracting - it is subsidised expenditure.
  • Where two companies are both carrying out R&D on the same subject they may decide to pursue the R&D jointly with each making a contribution and each free to enjoy any fruits of the R&D. This is collaborative research and each company would potentially be eligible for R&D relief on its share of the qualifying expenditure.
  • Where one company carrying out R&D pays another company for the provision of workers or materials this is not subcontracting of the R&D.
  • Where one company engages another company to carry out R&D activity on the first company’s behalf in exchange for payment then that is subcontracting of the R&D to the second company.
  • Where, for example, a consultant simply provides expert advice and charges for their time, that does not amount to subcontracting of R&D.

Subcontracting - differences in rules for SMEs and large companies

The rules in regard to qualifying expenditure for subcontracted R&D (CIRD84200) differ under the SME scheme and the large company scheme. Before considering mounting any arguments you should consider the appropriate tax treatment, so as to better focus attention on those areas where tax is at risk.