New rules for contracted out R&D - R&D Tax Reliefs (2024/25)

As part of a raft of changes to R&D tax reliefs that came into effect on 1 April 2024, there are some important updates relating to contracting out of R&D activities.

These all apply for accounting periods beginning on or after 1 April 2024.

What are the new rules?

For accounting periods beginning on or after 1 April 2024, the rules on contracting out R&D have changed and in the main, it will be the customer rather than the supplier that can claim the R&D costs as long as the customer contemplated or intended that R&D of this sort would need to be performed by the supplier.

It should be noted that subcontracted R&D rules under the new merged RDEC regime are different to the subcontracting rules under the current SME R&D tax regime (for accounting beginning prior to 1 April 2024).

When can a claim be made?

The guidance clarifies that the intention is for the initiator of the R&D to be able to claim under the new rules. Where R&D is carried out under a contract, the right to claim for contracted out R&D is generally with the customer, subject to certain exceptions.

For these purposes, R&D is defined as having been contracted out where it is “reasonable to assume that the customer intended or contemplated that R&D of this sort” would be done under the contract. If it is not reasonable to assume the customer intended / contemplated R&D at the point of contract, and the contractor initiates R&D, then the contractor may claim.

Example 

The guidance provides many examples and Example 20 is useful here to explain these rules:

Information that must be provided

In order for the customer to claim in relation to the payments to the contractor, the nature of the R&D that was to be undertaken (such as a statement of the advance in science or technology and what uncertainties need to be addressed) must be articulated, in order to show that it was intended or contemplated that R&D of a particular sort should be undertaken. This must go beyond listing project challenges and constraints.

The customer must be able to specify the required R&D, understand the R&D and be able to articulate the nature of the R&D. Mere speculation, general awareness, or acceptance that R&D may be needed will not be sufficient to satisfy the conditions.

Acceptable evidence

Although the guidance refers to there being a contract in place for R&D between both parties, it does not have to be a written contract and a verbal or implied contract would also be allowed. HMRC will also consider evidence such as;

• Intellectual property ownership;
• Financial risk in undertaking the work;
• Autonomy in how the activity is executed;
• The experience and seniority of decision-makers; and
• The nature of the parties (e.g. whether it is evident that the contractor specialises in providing R&D services and the contract is typical of those R&D activities).

Our advice

Our advice would be to retain evidence of both the contract itself and/or any documentation to support the position taken, e.g. discussions, emails etc between the customer and the contractor leading to the contract, or any internal documents showing how the activity was required as part of the customer’s wider R&D.

Similar to the existing SME scheme rules, if R&D is contracted out by a company not within the charge to UK Corporation tax – typically an overseas company, a Charity or Government department or a University, then the contractor will still be able to claim.

What do you need to do?

There are a lot of changes to consider and mainly it is about understanding who has the R&D project and who can claim the costs. If you need help to understand how these changes might affect you, the Radius team at Shorts is on hand to help you navigate through this.