D1.414 Subcontracted R&D expenditure
If there is a contract between two persons for R&D activities to be carried out by one of them for the other, the work has been subcontracted. R&D tax relief will depend on whether the claimant company has contracted out the R&D work or the work has been contracted out to the claimant company, it will also depend on whether the claimant company is an SME or a large company. The amount of relief may also depend on whether the parties are connected persons as defined in CTA 2010, s 1122 (see A1.156).
The following image shows a flowchart of R&D tax relief for subcontracting.
There is no definition of subcontracting in the legislation but HMRC gives some guidance at CIRD84250 which highlights the following:
• the contract should be a contract for services rather than a contract of service
• if the company carrying out R&D pays another company for workers this is not subcontracting, it may however be within the definition of externally provided workers (see D1.409A)
• subcontracting would take place when one company pays another company to carry out R&D activity for it with the paying company retaining the intellectual property from the R&D
• other aspects of the relationship to consider include the degree of autonomy of the subcontractor and the risks borne by each party
HMRC guidance1 indicates that the actual work carried out by the subcontractor need not, in isolation, be R&D, provided that from the company's perspective, it is one