This article and short video look at where the Contractor can claim the R&D relief on activities they undertake as part of contract delivery, under a Client and Contractor relationship, providing three example scenarios.
Below are three examples of the new RDEC contracted-out rules, where a Contractor has the right to claim the costs of relevant R&D on activities undertaken within contract delivery.
First a simple example: A Client contracts-out a non-R&D product or service, like constructing a building or developing software. The contract and contract negotiations indicate the Client had no research and development intent. If the Contractor subsequently undertakes R&D to deliver this contract, the Contractor can claim relevant costs.
Second example: Manufacturing Company A., hires a Contractor to develop specialist tooling, knowing R&D is needed but lacking expertise in it. The Contractor takes much of the financial risk on being able to develop the required tooling, hoping for a bulk order. The Contractor can claim this R&D costs, because they bear the risk and direct the R&D process.
Final example: A Property Developer hires a Contractor to construct a tower. Unexpected groundwork issues arise, and the Contractor conducts R&D at their own cost. Since the contract didn’t anticipate R&D, the Contractor can claim these costs. However, if the contract is renegotiated and the Property Developer funds further R&D, then the Contractor can claim the relevant costs of hiring the Contractor.
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.
See examples of where the 'Client' has the right to claim.