Subcontracted R&D activities

Who can claim?

If 1 person or company performs R&D on behalf of another party, then the R&D will have been subcontracted if the other party will own or benefit from the intellectual property rights. For example, a tech startup hires a development agency to make a new app the the agency is subcontracting.

So the tech startup will be able to claim R&D tax credits, but the development agency won’t be able to claim under the SME scheme.

But care needs to be taken to check the contractual arrangements.

Examples that aren’t subcontracting:

  • Contract of personal employment (ie in-house staff)
  • Contract to provide services, not an agreement to perform a specific part of the R&D activities
  • 1 company carries out R&D for its own purposes as it will use the intellectual property itself, but receives a subsidy from another company
  • Paying a supplier to provide staff or material

SME scheme

If expenditure has been subcontracted to an unconnected company, then only 65% of the payment will be eligible for R&D tax relief.

If a connected company is involved, then the amount that can be claimed is the lower of:

  • the actual payment
  • the relevant payment: the amount that the connected company spent on staff costs, workers and materials/software/consumables.

The payment also needs to be reflected in the subcontractor’s profit in their accounts.

Election to be connected

An election to be connected can also be made by writing to HMRC within 2 years of the end of the principal company’s accounting period. This could be beneficial as it could avoid the 65% restriction.


Key legislation:┬áCTA09/Ss1052(5) and 1053(4) – SME scheme