This blog is written to give a brief overview of how the R&D tax credits scheme works with regards to subcontracting, as it isn't quite as straight forward as the other areas within the scheme. A full guide by HMRC can be found here.
Contents
Why Subcontract R&D?
R&D can be subcontracted for many reasons. Some companies, regardless of size, simply don't have the capability to do everything within their R&D, take for instance a company designing a machine and they don't have the ability to create prototypes. In this case, the company would subcontract the creation of the prototypes to another, more experienced, company who can accomplish this to a higher standard.
The SME Scheme and the RDEC Scheme
Smaller companies, SMEs, will receive a larger amount in the R&D scheme. They can receive up to one third of their total qualifying R&D expenditure through the R&D tax credits scheme for SMEs. Larger companies can apply for a similar R&D tax credits scheme called the Research and Development Expenditure Credits (RDEC) scheme, which can provide up to a ninth of the total qualifying R&D expenditure.
R&D Tax Credits with Subcontractors Table
When working with subcontractors, the system becomes slightly more complex. R&D tax credits can still be claimed in most cases, however, who can claim the tax credits changes depending on both the subcontracting company and the subcontractors themselves.
Here, a simple table can be used to make the process of identifying whether or not you can claim more simple:
Subcontracting Company | Subcontractor | Who gets relief |
|---|---|---|
SME | SME | Subcontracting SME |
SME | Large Company | SME |
SME | Qualifying Body | SME |
Large Company | SME | SME |
Large Company | Large Company | Subcontracting Large Company |
Large Company | Qualifying Body | Large Company |
Large Company | Another Group Company | Group Company |
Generally, 65% of the payments made for a third-party to do subcontracted R&D can be claimed back. This may then be subcontracted further to other companies. In the event that work is subcontracted to a connected company, special rules will apply.
In the case where an SME is doing subcontracting work for a large company, the SME can claim back using the RDEC scheme. For this reason, it is recommended that SMEs familiarise themselves with both the SME and RDEC schemes, or that they work with a specialist that can distinguish between the two.
How to Make a Claim
To make an R&D claim an R&D report must be written including all required technical information demonstrating to the HMRC that there was qualifying R&D. Additionally, HMRC may require you to break down the costs associated that make up the claim. This should be sent to support the claim made in your CT600 tax return form.
Making the claim can be arduous and difficult, and a wealth of knowledge of the HMRC is often necessary. Due to this, we recommend having a professional help with this. See what Inovasi can help you with here.
Inovasi helps companies to innovate with innovation incentives: R&D, Tax Credits, The Patent Box Scheme, and Funding. Inovasi aims to save you time, so you can focus on the core of your business, we offer expert advice, you can rest easy knowing your claim has been strictly adhered to HMRC legislation, reducing the chance of an inquiry, maximise all aspects of your innovation process, experienced, up to date on the latest guidance and changes related to R&D.
For this reason, we would suggest using an R&D specialist. At Inovasi, we take the time to understand you and your business, taking all the heavy work away from you, and we can ensure a robust and compliant report will be sent to HMRC to support your claim. In the unlikely event of a random inquiry, we will act on your behalf and show to HMRC how the project and costs associated are indeed qualifying. A technical advisor can help you figure out what is and isn’t R&D under the scheme.
To find out more about the R&D scheme please visit www.inovasi.co.uk or get in touch with Inovasi at hello@inovasi.co.uk