hen R&D work undertaken by a subcontractor is subsidised, tax relief is not available to the subcontractor under the SME R&D scheme. Following two recent taxpayer wins at the First-tier Tribunal, HMRC has updated its guidance to clarify its definition of ‘subsidised’ for R&D purposes.

Generally, where R&D is contracted out to the subcontractor and reimbursed by the client company, the subcontractor cannot claim R&D relief. However the guidance has been updated to advise that the terms of the contract are not the only factor to consider.

Examples of other factors include:

Whether the R&D is incidental to the supply of a product or service;

The degree of autonomy over the R&D work;

The level of financial risk involved; and

Who retains the intellectual property.

Where R&D occurs as part of an overall contract, for example a builder who encounters an unexpected problem on a job might develop a new process to address that problem, the guidance confirms that expenditure is not considered to be subsidised unless there is a clear link between the amount paid by the customer and the R&D expenditure. This is a significant shift from HMRC’s previous view that expenditure was subsidised even where the costs were indirectly met by the client through project payments.

This change to the guidance means that if a subcontractor develops a new process during one project that has the potential to generate economic benefits for them on future projects, the subcontractor will likely be entitled to claim the R&D relief.

If you undertake R&D work on behalf of clients, or engage third parties to carry out such work on your behalf, we can help you decide whether you are eligible to claim R&D relief.