HMRC has recently updated its guidance on subcontracted R&D following two rulings in the First-Tier Tribunal (FTT), a significant development for businesses claiming R&D tax relief. The changes clarify HMRC’s stance on which companies can claim relief when work is subcontracted, marking a shift in how claims are assessed.
Background: HMRC’s Previous Position
For a time, HMRC has maintained that work carried out under a contract cannot be claimed for R&D tax relief; which marked a stark change from previous guidance on the subject. This led to disputes over whether the ‘main contractor’ (who commissions R&D work) or the ‘subcontractor’ (who carries out the R&D) could make a valid claim. HMRC frequently rejected claims from subcontractors, asserting that they were merely performing R&D on behalf of another company rather than undertaking their own qualifying R&D. This approach has been disputed, as it could lead to cases where R&D work was performed, but no company could make a claim for it due to their contractual arrangements.
The Tribunal Cases That Led to Change
The FTT rulings in Stage One Creative Services Ltd v HMRC and Collins Construction Ltd v HMRC challenged HMRC’s restrictive interpretation. In both cases, HMRC argued that the companies carrying out the R&D work as subcontractors were ineligible to claim tax relief. However, the tribunal disagreed, ruling that the claimants had undertaken R&D in their own right, not merely on behalf of another entity. This also clarified that the mere existence of a contract is not enough to disqualify a company from performing qualifying R&D.
These decisions demonstrated that a rigid approach to subcontracted R&D did not align with the legislation and is not an appropriate interpretation. The rulings made it clear that even where a company was contracted to perform R&D, it could still qualify for relief if it bore technical and financial risk.
HMRC’s New Guidance: Key Changes
Following these rulings, HMRC has updated its Corporate Intangibles Research and Development Manual (CIRD84250) to reflect a more nuanced approach. The new guidance acknowledges that:
- A company can still claim R&D tax relief even if it was contracted to carry out the work, provided it was engaged in seeking a scientific or technological advance.
- A key factor is whether the claimant company had autonomy in determining how the R&D was undertaken and bore the technical uncertainty.
- Subcontractors may now be able to claim where they assume the financial risk for the R&D project, a departure from HMRC’s previous insistence that only the commissioning party could do so.
What This Means for Your R&D Claims
These changes present a major opportunity for businesses that were previously excluded from claiming R&D tax relief under HMRC’s old approach. Companies that conduct R&D under contract should now reassess their eligibility, particularly if they:
- Took on technical risk and uncertainty in developing a new process, product, or service.
- Had autonomy in conducting the R&D rather than following rigid client instructions.
- Faced previous claim rejections based on HMRC’s restrictive subcontracting stance.
This update could mean that businesses that were previously unable to claim may now have a strong case for R&D tax relief.
There is a big question mark on how HMRC will handle previous SME claims which have been rejected, or which were submitted under the RDEC scheme, due to their previous interpretation of legislation. The amendment deadline for many of these financial periods has passed and so far, HMRC have not made mention of intent to apply the new guidance retrospectively.
Next Steps: Reviewing Your R&D Eligibility
At Kapitalise, we specialise in helping businesses navigate the complexities of R&D tax relief. If your company has been involved in subcontracted R&D and was previously told it could not claim, now is the time to revisit that decision. Get in touch with our team to assess whether these changes mean you could recover valuable tax relief.
HMRC’s revised stance highlights the importance of challenging unfair interpretations and staying up to date with evolving tax guidance. With the right expertise, your business can make the most of the incentives designed to support innovation in the UK.
Kapitalise will support you throughout the entire R&D claim process. To find out how we can help you, please contact us.