This article and short video look at new RDEC rules on contracted-out Research and Development, where the Client Company awarding the contract can claim the R&D costs. It includes three scenarios to illustrate the rules. Both parties cannot claim the same costs!
Below are three examples of the new RDEC contracted-out rules, where the Company (i.e. the Client) letting a contract, which includes undertaking R&D, has the right to claim the costs of relevant R&D, for activities undertaken within contract delivery.
First example: A Software Developer has an R&D project but needs more capacity, so they hire a Contractor for a specific development task. The contract details the R&D work. Since the Software Developer intended this R&D and has competence in the nature of the R&D, they have the right to claim the R&D costs.
Second example: Company A. is developing a new drug and hires a Contractor for testing. This testing is part of Company A's R&D because they intended it, and understand the nature of the R&D, even if their Contractor is unaware of the full project.
Final example: UK Automotives contracts out gearbox research and development to a US company, which then subcontracts it to their UK subsidiary. Given that UK Automotives specified and intended the R&D, and the activity is undertaken in the UK, they have the right to claim the costs. The US Company can’t claim as they are not subject to UK Corporation Tax. Their UK subcontractor can’t claim because UK Automotives is eligible to claim the costs. If the US company had undertaken the work in the US and overseas restrictions applied, then the UK company would be unable to claim the costs.
Key takeaway: If a Client company contemplates, specifies and pays for the R&D they contract-out, they usually have the right to claim the costs.
Note: there are restrictions on claiming expenditure where a Contractor undertakes R&D activities overseas and only a portion (currently 65%) of relevant, Contractor costs can be claimed by a Client as qualifying expenditure, unless the Client and their Contractor are classified as Connected Parties. For Connected Parties 100% of the relevant cost may be claimed.
The above were adapted from examples provided by HMRC on their website.
The key factors are who specifies and intends the R&D and who holds the financial risk.