When making a claim for Research and Development (R&D) Tax Relief in the UK, it’s crucial to understand how the concept of 'connected companies' and 'connected persons' can impact the claim. This article and summary video, explain what is meant by these terms, why it matters for R&D tax relief claims and how HMRC’s rules determine whether a company or person is considered connected.
Connected Companies and R&D Tax Relief Claims in the UK: Why Does it Matter?
The concept of connected connected companies and individual, referred to in recent guidelines as connected 'persons', needs to be understood as it can impact on a company's R&D claims. In particular it has relevance when using Contractors, or agency staff - known as Externally Provided Workers (EPWs) to undertake R&D. It also impacts qualification for the Small & Medium Enterprise (SME), Enhanced R&D Intensive Support - ERIS.
In Summary Connections Determine:
1. The level of expenditure that can be claimed for:
Contracted-out R&D
EPWs undertaking R&D
2. Eligibility to claim ERIS:
whether a company qualifies as a Small & Medium Enterprise (SME); and
whether a company meets qualification criteria for ERIS.
Failure to consider connections can result in underclaimed or overclaimed tax relief and potential challenges from HMRC. If you are up against the final deadline for filing an R&D claim, it could also mean your claim is lost, as errors may lead to a rejection of your submission. If that comes after the submission deadline is passed, there is no way to resubmit and the R&D claim is lost.
How Are Connections Determined?
In the context of R&D Tax Relief and other areas of tax law—HMRC applies rules to determine when two companies (or a company and a person) are considered connected.
The rules are based on company and tax law definitions - the key rules include:
A. Connected Companies
Two companies are connected if:
One company controls, or is controlled, by the other (directly or indirectly); or
Both companies are controlled by the same person(s) or group of persons.
“Control” generally means the ability to exercise more than 50% of the voting rights, share capital, or rights to income or assets.
Example: If Company A owns 51% of Company B’s shares, they are connected.
B. Connected Persons
A company is connected to an individual if:
The individual controls the company; or
The company is controlled by associates of the individual (e.g. close relatives, business partners, or trusts where the individual has an interest).
HMRC defines associates broadly to include:
Spouses or civil partners
Children and their spouses
Parents, siblings, grandparents, and their spouses
Business partners and partnerships where the individual is a partner
Example: If an individual owns 60% of Company A and their spouse owns 51% of Company B, HMRC may treat Company A and Company B as connected because of the family connection and combined control.
1. Impact on Claiming Contracted-Out R&D and EPW Expenditure
Where a Contractor or an organiation providing EPWs (i.e. a staff agency) is unconnected to the R&D claimant, 65% of the relevant R&D costs can be claimed.
However, where the contractor or EPW provider is a connected company, the amount that can be claimed is limited to the lower of:
The amount paid by the R&D claimant company; and
The actual costs incurred by the Contractor or Staff Provider (i.e. it is expected that there is transparency to examine the cost details in the company delivering the R&D contract or providing the EPWs).
This rule is there to ensure that R&D expenditure is not being inflated, due to the connection. However if may also mean that the amount you can claim is higher that the 65% allowed for unconnected Contractor and EPW costs.
2. Impact on Eligibility to Claim ERIS
The more generous Small & Medium Enterprise (SME), Enhanced R&D Intensive Scheme (ERIS) is only applicable to loss-making SMEs.
To qualify as an SME for R&D incentives, a company must have fewer than 500 employees and be below certain turnover or balance sheet thresholds. When assessing these thresholds, connected and partnership companies must be included by adding the relevant data (e.g. the employee numbers) together.
Where there is not full control, but a significant relationship (e.g. 25-50% ownership of one company by another), these relationships must also be included, but the data to include are proportional to the ownership percentage.
Similarly, when assessing the level of expenditure and whether there is a loss before the R&D is calculated, to look at qualification for ERIS, connected companies—whether connected by shares or by a person—must be included in the calculations.
Practical Tips
Check ownership structures: Identify direct and indirect owners of your company and any associated companies.
Map relationships: Consider family and business relationships that could create connections.
Review contractor relationships: Assess whether payments are made to contractors that would be deemed connected parties and how this affects your claim.
Consult advisors: Seek professional advice if you’re unsure about connections, especially for complex ownership structures or family businesses.
Conclusion
Understanding and applying HMRC’s connected persons rules is crucial for maximising your RDEC claim while staying compliant. If you’re planning to submit a claim or are reviewing your eligibility, take the time to assess how these rules might affect your company’s position.
For more on this topic visit HMRCs page on connected persons.
When making a claim for Research and Development (R&D) Tax Relief in the UK, it’s crucial to understand how the concept of 'connected companies' and 'connected persons' can impact the claim. This article and summary video, explain what is meant by these terms, why it matters for R&D tax relief claims and how HMRC’s rules determine whether a company or person is considered connected.
Connected Companies and R&D Tax Relief Claims in the UK: Why Does it Matter?
The concept of connected connected companies and individual, referred to in recent guidelines as connected 'persons', needs to be understood as it can impact on a company's R&D claims. In particular it has relevance when using Contractors, or agency staff - known as Externally Provided Workers (EPWs) to undertake R&D. It also impacts qualification for the Small & Medium Enterprise (SME), Enhanced R&D Intensive Support - ERIS.
In Summary Connections Determine:
1. The level of expenditure that can be claimed for:
Contracted-out R&D
EPWs undertaking R&D
2. Eligibility to claim ERIS:
whether a company qualifies as a Small & Medium Enterprise (SME); and
whether a company meets qualification criteria for ERIS.
Failure to consider connections can result in underclaimed or overclaimed tax relief and potential challenges from HMRC. If you are up against the final deadline for filing an R&D claim, it could also mean your claim is lost, as errors may lead to a rejection of your submission. If that comes after the submission deadline is passed, there is no way to resubmit and the R&D claim is lost.
How Are Connections Determined?
In the context of R&D Tax Relief and other areas of tax law—HMRC applies rules to determine when two companies (or a company and a person) are considered connected.
The rules are based on company and tax law definitions - the key rules include:
A. Connected Companies
Two companies are connected if:
One company controls, or is controlled, by the other (directly or indirectly); or
Both companies are controlled by the same person(s) or group of persons.
“Control” generally means the ability to exercise more than 50% of the voting rights, share capital, or rights to income or assets.
Example: If Company A owns 51% of Company B’s shares, they are connected.
B. Connected Persons
A company is connected to an individual if:
The individual controls the company; or
The company is controlled by associates of the individual (e.g. close relatives, business partners, or trusts where the individual has an interest).
HMRC defines associates broadly to include:
Spouses or civil partners
Children and their spouses
Parents, siblings, grandparents, and their spouses
Business partners and partnerships where the individual is a partner
Example: If an individual owns 60% of Company A and their spouse owns 51% of Company B, HMRC may treat Company A and Company B as connected because of the family connection and combined control.
1. Impact on Claiming Contracted-Out R&D and EPW Expenditure
Where a Contractor or an organiation providing EPWs (i.e. a staff agency) is unconnected to the R&D claimant, 65% of the relevant R&D costs can be claimed.
However, where the contractor or EPW provider is a connected company, the amount that can be claimed is limited to the lower of:
The amount paid by the R&D claimant company; and
The actual costs incurred by the Contractor or Staff Provider (i.e. it is expected that there is transparency to examine the cost details in the company delivering the R&D contract or providing the EPWs).
This rule is there to ensure that R&D expenditure is not being inflated, due to the connection. However if may also mean that the amount you can claim is higher that the 65% allowed for unconnected Contractor and EPW costs.
2. Impact on Eligibility to Claim ERIS
The more generous Small & Medium Enterprise (SME), Enhanced R&D Intensive Scheme (ERIS) is only applicable to loss-making SMEs.
To qualify as an SME for R&D incentives, a company must have fewer than 500 employees and be below certain turnover or balance sheet thresholds. When assessing these thresholds, connected and partnership companies must be included by adding the relevant data (e.g. the employee numbers) together.
Where there is not full control, but a significant relationship (e.g. 25-50% ownership of one company by another), these relationships must also be included, but the data to include are proportional to the ownership percentage.
Similarly, when assessing the level of expenditure and whether there is a loss before the R&D is calculated, to look at qualification for ERIS, connected companies—whether connected by shares or by a person—must be included in the calculations.
Practical Tips
Check ownership structures: Identify direct and indirect owners of your company and any associated companies.
Map relationships: Consider family and business relationships that could create connections.
Review contractor relationships: Assess whether payments are made to contractors that would be deemed connected parties and how this affects your claim.
Consult advisors: Seek professional advice if you’re unsure about connections, especially for complex ownership structures or family businesses.
Conclusion
Understanding and applying HMRC’s connected persons rules is crucial for maximising your RDEC claim while staying compliant. If you’re planning to submit a claim or are reviewing your eligibility, take the time to assess how these rules might affect your company’s position.
For more on this topic visit HMRCs page on connected persons.
When making a claim for Research and Development (R&D) Tax Relief in the UK, it’s crucial to understand how the concept of 'connected companies' and 'connected persons' can impact the claim. This article and summary video, explain what is meant by these terms, why it matters for R&D tax relief claims and how HMRC’s rules determine whether a company or person is considered connected.
Connected Companies and R&D Tax Relief Claims in the UK: Why Does it Matter?
The concept of connected persons, which includes connected companies and individual, needs to be understood as it can impact on a company's R&D claims, in particular when using Contractors, or agency staff - known as Externally Provided Workers (EPWs) to undertake R&D. It also impacts qualification for the Small & Medium Enterprise (SME), Enhanced R&D Intensive Support - ERIS.
In Summary Connections Determine:
1. The level of expenditure that can be claimed for:
Contracted-out R&D
EPWs undertaking R&D
2. Eligibility to claim ERIS:
whether a company qualifies as a Small & Medium Enterprise (SME); and
whether the company meets qualification criteria for ERIS.
Failure to consider connections can result in underclaimed or overclaimed tax relief and potential challenges from HMRC. If you are up against the final deadline for filing an R&D claim, it could also mean your claim is lost as errors may lead to a rejection of your submission and if that comes after the submission deadline is passed, there is no way to resubmit, the R&D claim is lost.
How Are Connections Determined?
In the context of R&D Tax Relief and other areas of tax law—HMRC applies rules to determine when two companies (or a company and a person) are considered connected.
The rules are based on company and tax law definitions - the key rules include:
A. Connected Companies
Two companies are connected if:
One company controls, or is controlled, by the other (directly or indirectly); or
Both companies are controlled by the same person(s) or group of persons.
“Control” generally means the ability to exercise more than 50% of the voting rights, share capital, or rights to income or assets.
Example: If Company A owns 51% of Company B’s shares, they are connected.
B. Connected Persons
A company is connected to an individual if:
The individual controls the company; or
The company is controlled by associates of the individual (e.g. close relatives, business partners, or trusts where the individual has an interest).
HMRC defines associates broadly to include:
Spouses or civil partners
Children and their spouses
Parents, siblings, grandparents, and their spouses
Business partners and partnerships where the individual is a partner
Example: If an individual owns 60% of Company A and their spouse owns 51% of Company B, HMRC may treat Company A and Company B as connected because of the family connection and combined control.
1. Impact on Claiming Contracted-Out R&D and EPW Expenditure
Where a Contractor or an organiation providing EPWs (i.e. a staff agency) is unconnected to the R&D claimant, 65% of the relevant R&D costs can be claimed.
However, where the contractor or EPW provider is a connected company, the amount that can be claimed is limited to the lower of:
The amount paid by the R&D claimant company; and
The actual costs incurred by the Contractor or Staff Provider (i.e. it is expected that there is transparency to examine the cost details in the company delivering the R&D contract or providing the EPWs).
This rule is there to ensure that R&D expenditure is not being inflated, due to the connection. However if may also mean that the amount you can claim is higher that the 65% allowed for unconnected Contractor and EPW costs.
2. Impact on Eligibility to Claim ERIS
The more generous Small & Medium Enterprise (SME), Enhanced R&D Intensive Scheme (ERIS) is only applicable to loss-making SMEs.
To qualify as an SME for R&D incentives, a company must have fewer than 500 employees and be below certain turnover or balance sheet thresholds. When assessing these thresholds, connected and partnership companies must be included by adding the relevant data (e.g. the employee numbers) together.
Where there is not full control, but a significant relationship (e.g. 25-50% ownership of one company by another), these relationships must also be included, but the data to include are proportional to the ownership percentage.
Similarly, when assessing the level of expenditure and whether there is a loss before the R&D is calculated, to look at qualification for ERIS, connected companies—whether connected by shares or by a person—must be included in the calculations.
Practical Tips
Check ownership structures: Identify direct and indirect owners of your company and any associated companies.
Map relationships: Consider family and business relationships that could create connections.
Review contractor relationships: Assess whether payments are made to contractors that would be deemed connected parties and how this affects your claim.
Consult advisors: Seek professional advice if you’re unsure about connections, especially for complex ownership structures or family businesses.
Conclusion
Understanding and applying HMRC’s connected persons rules is crucial for maximising your RDEC claim while staying compliant. If you’re planning to submit a claim or are reviewing your eligibility, take the time to assess how these rules might affect your company’s position.
For more on this topic visit HMRCs page on connected persons.