This is a bit of a departure from the old SME scheme, and there are two specific instances where a company can include this type of payment in their claim.

Routine subcontracted activities

This first situation is pretty simple and involves routine activities that support or are part of a wider R&D project. If these routine activities were contracted out, they can be included as part of an R&D claim. The only stipulation here is that the routine activities were in some way linked to or required for the company’s R&D.

A good example is the lab testing of samples when the company doesn’t have access to the proper on-site facilities. Testing samples is completely routine when viewed in isolation, but as long as the activity supports a wider R&D project it can still be included in a claim.

However, subcontracting gets trickier when the contracted-out activities are qualifying R&D in their own right.

Independently qualifying subcontracted activities

The second scenario in which subcontracted activities can be included in an R&D claim is when they involve R&D in their own right. Who can claim in this case? The subcontractor who’s performing the R&D or the customer who’s paying for it?

HMRC’s new guidance states that the right to claim for an R&D project sits with the party that “intended” or “contemplated” that R&D was required. You might find this wording a little odd, but it essentially means that whoever initially recognised the need for the activity, and decided to undertake it, gets to claim for it.

This seems pretty straightforward, but it’s going to be interesting to see how it plays out in practice. Are we going to see contractors’ claims denied on the basis that R&D was “intended” or “contemplated” by the customer? Similarly, are we going to see claims denied on the basis of insufficient evidence that R&D was “intended” or “contemplated”?

Let’s take a look from both sides.

Considerations for the customer

Customers now need to consider the wider scope of any contracted-out development activities before they enter into an agreement with a contractor. The customer might know that they need a piece of bespoke machinery, but can they state exactly how and why the product embodies an advance in science or technology before the contractor begins work?

In order to claim for the activities later, they’ll need to consider some general questions about eligible R&D activities:

• What specific technological barriers are impeding successful development?
• What new knowledge or capability would be achieved if the development was successful?
• Has a competent professional within the business assessed the technological baseline of the industry and its existing capabilities?

Of course, they might not know the answers to these questions when initially considering the commercial project. They would probably discuss it with the contractor before agreeing terms. If they do, they should ideally create some record that this R&D discussion took place. This could be the contract itself or the correspondence with the contractor prior to any agreement being made.

This is evidence and information that you need to be sure they can provide before you include these activities in a claim.

Considerations for the contractor

When is a contractor able to claim for the activities? While the wider business context must be taken into account, the most important document is likely to be the contract and whether it indicates that R&D was “intended” or “contemplated” by the customer.

If the contract involves a simple agreement for the provision of goods or services, that wouldn’t be enough evidence for the customer to claim. This could potentially allow the contractor to make a claim instead.

In the case of an agreement to solve a technical problem or provide a bespoke solution, the right to claim depends on the answers to some additional questions:

• Who owns the intellectual property generated from the project?
• Who bears the financial risk of the R&D?
• How much autonomy does the contractor have?

If the contractor can show that it was them who decided to undertake R&D, then the claim should rest with them rather than their customer.

Is that everything you need to know?

Qualifying R&D activities always require a thorough assessment made by a competent professional. If that assessment is made and evidenced post-contract, then any R&D claim is likely to reside with the contractor. If those discussions take place pre-contract, and there was evidence to support this, then the claim is likely to sit with the customer. HMRC has advised that it might be useful to include a specific clause in contracts to confirm both parties’ understanding of the situation.

Subcontracting is one of the areas that’s changed significantly in the Merged Scheme, and this article covers just one small aspect of it. Areas like overseas expenditure and grants and subsidies have also seen significant changes. To get a summary, take our free course: An Advisor’s Essential Guide to the Merged R&D Scheme.