The costs you can claim are affected when an SME subcontracts to other SMEs with the same shareholders. When you subcontract elements of your R&D work, you can usually include up to 65% of the costs in your R&D tax credit claim. But when you and the subcontractor have the same shareholders (are connected parties) different rules apply.
If a company being subcontracted to carry out R&D activity is under common control with the company contracting out the work, these companies are classified as ‘connected’. This affects how the qualifying expenditure is calculated.
Unconnected subcontractors in an R&D tax credit claim
If you contract out a portion, or all, of your R&D activities to unconnected subcontractors, you can claim 65% of the costs attributable to this work.
And if only part of the services supplied by your subcontractor are R&D, you can only include 65% of that proportion in your R&D tax credit claim.
Connected companies in an R&D tax credit claim
Two companies with the same shareholders are considered connected parties for the purposes of subcontractor costs.
If you are connected to your subcontractor in this way, you may be able to claim more or less than 65%. The exact amount will depend on the actual costs involved. We recommend seeking professional advice to ensure your costs here are properly captured.
For R&D subcontracted to a connected party, you can claim R&D tax credits on the lower of:
- The payment that it makes to the subcontractor; and
- The relevant expenditure of the subcontractor.
If you are still not sure about subcontracted work and R&D tax credit claims for connected and unconnected SMEs, get in touch.
ForrestBrown have a deep understanding of the R&D tax credit schemes. Our team of chartered tax advisers, sector specialists, lawyers and ex-HMRC inspectors help companies accurately identify all their qualifying activities and costs. This results in a robust claim that means you don’t miss out on any benefit value, but peace of mind it is supported with evidence to satisfy HMRC.
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It can be complicated to submit an R&D tax credit claim to HMRC’s exacting standards.
Get in touch with our team of chartered tax advisers, chartered accountants, lawyers, sector specialists, former HMRC inspectors and quality assurance experts to access expert guidance for your claims.