Contracted Out R&D - Who Claims?

Who is actually entitled to claim?

This matters because by the end of February 2027, virtually all R&D claims being submitted will fall entirely within the merged RDEC framework. The old SME subcontracting rules will no longer be relevant for most claimants, making it essential that businesses understand how HMRC approaches contracted-out R&D under the new regime.

The Fundamental Shift

Historically, many SME companies assumed that if they carried out the technical work, they could claim the relief, either under the SME scheme or under the old RDEC.

Under the merged scheme, that assumption is often incorrect.

HMRC's guidance now places significant emphasis on identifying the party that initiated or commissioned the R&D activity. The question is no longer simply who performed the work, but who decided the R&D needed to happen in the first place.

This represents one of the most significant policy changes introduced through the merged scheme.

For many businesses, particularly those operating in software development, engineering, manufacturing, product design and technical consultancy, this change can have a major impact on claim eligibility.

Why HMRC Is Focusing on Contracted-Out R&D

The government's objective is straightforward: to prevent multiple parties claiming relief for the same underlying R&D activity and to ensure that support is directed towards the organisation bearing responsibility for the innovation.

As a result, HMRC increasingly examines:

• Who initiated the project?

• Who expected the R&D to be undertaken?

• Who controlled the objectives?

• Who bore the technical risk?

• Who ultimately benefited from the technological advance?

These questions often reveal a very different picture from the contractual wording alone.

Recent updates to HMRC guidance have reinforced the importance of considering the commercial reality of a project rather than relying solely on contractual labels.

Other pages provide examples of where the Client has the right to claim and where the Contractor has the right to claim the R&D costs. 

The Most Common Misunderstanding

One misconception continues to appear in many claims from Contractors working for Clients:

"We developed the solution therefore we can claim."

Unfortunately, the merged scheme is not that simple.

Consider a manufacturing business that commissions a specialist engineering company to develop a new production process.

The engineering company may perform all of the technical work and employ competent professionals. However, if the manufacturer identified the need, commissioned the development and expected R&D to be undertaken to achieve the objective, the manufacturer may be the party entitled to claim.

In contrast, consider a software company delivering a commercial project for a customer.

The customer may simply require a business outcome, while the software company independently undertakes R&D to overcome technological uncertainties encountered during delivery. In that scenario, the software company may retain entitlement to claim.

The facts matter.

The commercial relationship matters.

Most importantly, the surrounding circumstances matter.

Recent HMRC Guidance Developments

During 2025, HMRC updated elements of its guidance following several tribunal decisions and industry feedback.

One of the clearest messages emerging from these updates is that contractual wording alone is not determinative.

Simply inserting clauses stating that R&D is not being commissioned will not necessarily determine entitlement if the commercial reality indicates otherwise.

HMRC is increasingly interested in understanding:

• Whether R&D was anticipated by the customer.

• Whether technical uncertainty formed part of the agreed deliverables.

• Whether the customer exercised significant control over objectives.

• Whether the claimant retained meaningful autonomy in determining how the solution would be achieved.

This creates additional importance for robust project documentation and clear explanations within claim submissions.

The Growing Importance of the Additional Information Form

The Additional Information Form (AIF) has become much more than an administrative requirement.

For many claims, it is now HMRC's first opportunity to assess entitlement before reviewing the Corporation Tax return in detail.

The information provided can influence whether a claim is viewed as low risk or selected for further scrutiny.

Where contracted-out R&D is involved, businesses should ensure that project narratives clearly explain:

• The claimant's role in initiating the R&D.

• The nature of any customer relationship.

• Why the claimant believes it is entitled to relief.

• The role of subcontractors where relevant.

• How the commercial arrangements align with the technical narrative.

One issue we continue to see is inconsistency between project descriptions and commercial reality. If a claimant describes extensive customer-led development while simultaneously asserting full entitlement to the relief, questions are likely to follow.

Questions Every Claimant Should Ask

Before submitting a claim involving customers, subcontractors or collaborative development arrangements, consider the following:

• Who decided the R&D should take place?

• Did the customer expect R&D to be undertaken?

• Who controlled the objectives?

• Who bore the technological risk?

• Could the deliverable have been achieved without undertaking R&D?

• Does the contractual documentation support the position being taken?

• Does the project narrative in the AIF align with the commercial arrangements?

If these questions cannot be answered clearly and consistently, the risk of HMRC challenge increases significantly.

Looking Ahead to 2027

As the transition to the merged RDEC regime completes, contracted-out R&D will become one of the most important technical considerations in the entire claims process.

The key question is no longer whether qualifying R&D took place.

Instead, businesses must be prepared to demonstrate why they, rather than another party involved in the project, are entitled to claim the relief.

For many organisations, that means reviewing contracts, documenting commercial arrangements more carefully and ensuring that project narratives clearly explain the basis of entitlement.

Those that do so will be in a far stronger position to defend their claims as HMRC continues to focus on contracted-out R&D under the merged scheme.

Question for readers:

How many of your current R&D projects involve customers, subcontractors or collaborative development arrangements, and are you confident that the correct party is making the claim?

Here is a link to official guidelines with more details.

Visit Claiming RDEC Index Page.