Yes, an SME carrying out research and development (R&D) will usually be able to claim 65% of the costs paid to any subcontractor for qualifying activities. For companies who fall under the RDEC scheme, the subcontractor must be an individual, partnership of individuals, or a qualifying body for the expenditure to be eligible.
Subcontracted work on an R&D project is where you engage someone else to carry out R&D activity on your behalf in exchange for payment.
For R&D purposes, your subcontractor need not be UK-resident, and there is no requirement for the subcontracted R&D work to be performed in the UK. Additionally, the actual work carried out by the subcontractor need not be R&D itself when looked at in isolation. But it should form a component of your larger R&D project.
The subcontractor and contractor relationship
The nature of the relationship between the subcontractor and the contractor must be considered in your claim: i.e. Where is the work to overcome the uncertainty taking place? You must be careful that the costs you are claiming are in respect of qualifying R&D activities. When making this assessment, you should consider:
In subcontracted R&D, the subcontractor is being paid for the outcome of the R&D, regardless of the project’s success. It is therefore expected that any failures or overruns would be incurred by the principal company rather than the subcontractor.
You should be carrying out an R&D project and contracting out a specific part of that project to the subcontractor. It would therefore be expected that you are knowledgeable in the area of development and outline a detailed specification of the work to be carried out.
If there is a very low level of autonomy and high level of supervision, the relationship may not be classified as subcontracting and in fact be considered as an externally provided worker. If an SME is subcontracting qualifying activities, they will have a vested interest in the R&D, but the subcontractor will enjoy a degree of autonomy in resolving the uncertainties.
- Intellectual property (IP)
If your R&D is subcontracted it is generally expected that the IP will vest with the principal company. However, this can be complex area and is used as an indicator rather than being conclusive to the status of the relationship.
When you have considered these criteria and established that you, as an SME, are subcontracting qualifying R&D activity, then your subcontracted costs can be included in the claim.
How much to claim for subcontractors in an SME R&D tax credit claim
If you are an SME, you can claim up to 65% of the costs paid to a subcontractor for R&D if your subcontractor is unconnected. Connected parties are where two companies are controlled by the same person or in the same group. If you are connected, then the claim will be for the lesser of the R&D payment made to the subcontractor and the relevant expenditure of the subcontractor. For more information, you might like to read our related article: How is an R&D tax credit claim affected by SMEs subcontracting to other SMEs with the same shareholders?
PAYE / NIC
To prevent abuse of the SME payable R&D tax credit, the government will reintroduce a PAYE and NIC cap on the SME payable credit in 2021. Originally planned for April 2020 this has been postponed to allow further consultation on the design of the cap.
How are subcontractors treated in RDEC claims?
The costs that you can include for subcontractors differs between RDEC and the SME R&D tax credit scheme. Large companies (and any SMEs) who are claiming under the RDEC scheme are only able to claim subcontractor costs if payments are made to an individual, a partnership of individuals or a charity, higher education institute, scientific research organisation or health service body. If you have subcontractor costs that meet this definition, you can include 100% of your expenditure in your RDEC claim.
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