Subcontracted R&D: who claims, and how much.

HMRC's guidance says only the company that decides the R&D needs doing, and can evidence that decision and the planning behind it, can claim the cost of contracting it out. That is usually the customer commissioning the work. The question is therefore not who did the work or who paid, but who took the decision that the R&D should take place.

It depends on who decided the R&D needed doing. If your client made that decision, the contracted-out rule points to the client as the company that can claim the cost of contracting it out. If you decided and planned the R&D, and the client simply buys the result, the position may differ. We test the facts and the contract before advising.

Documents from the time: board or management papers choosing to pursue the project, specifications and briefs you issued, emails and meeting notes setting direction, and the plan that sets out the technical objective. Evidence written after HMRC asks is much weaker. The aim is to show that the decision and planning were yours, not the subcontractor's.

Work that your company has another party carry out on its behalf, where the work itself is R&D. It is distinct from buying a finished product or an ordinary service. The same payment can be part R&D and part not. We analyse the contract and what the supplier did, then identify the portion that is R&D.

For an unconnected subcontractor, 65% of the payment qualifies. For a connected subcontractor, it is the lower of the payment and the subcontractor's relevant costs. Record the full payment in your accounts and apply the percentage in the claim calculation, not in the ledger. The same rules apply to externally provided workers.

Yes. For accounting periods beginning on or after 1 April 2024, contracted-out R&D qualifies only if the work is done in the UK or is qualifying overseas expenditure. Cost and worker availability do not count towards that test. Claims can lose value here, so the location of every subcontractor should be recorded.

The cost is the lower of the payment and the subcontractor's relevant costs, rather than 65% of the payment. A connected relationship also affects the PAYE cap exemption, which is lost if connected-party EPW and contractor costs exceed 15% of qualifying expenditure. Map the group and ownership links before you start the calculation.

There is no general rule in HMRC's guidance requiring it, but it is sensible to agree the position in writing. If both sides assume they can claim, or neither does, value can be lost or an incorrect claim made. A short clause or exchange of emails saying who decided and who will claim is good practice.

State who defines the technical objective, who controls the plan, who receives the results and where the work will be done. Avoid wording that suggests the supplier chose the project, if you are the one claiming. Contract terms about location do not qualify overseas work on their own, so do not rely on them for that.

The contracted-out rule points to one claimant for the cost of contracting out, the company that decides the R&D needs doing. Whether the other party has a separate claim for R&D it carries out for its own account turns on its own facts. We analyse both sides before advising, particularly in long-running joint projects.

Possibly. Contracted-out R&D is one of the four areas covered by HMRC's targeted advance assurance pilot, launched on 18 May 2026 for SMEs. You can make up to two applications, each on one project and one area. HMRC aims to decide within 40 calendar days. HMRC's overview says the pilot runs until May 2027.

Keep the contract, statement of work, invoices, proof of payment and a summary of what the subcontractor did and where. Map each payment to a named project and note any connection between the companies. Where an invoice covers work that is not R&D, record how the R&D share was identified. These records support both the claim and any later check.

For accounting periods beginning on or after 1 April 2024, the merged scheme and ERIS replaced the SME and RDEC schemes, and contracted-out R&D became subject to the overseas restriction. The qualifying cost rules, including the decision-maker test, the 65% rule and the connected-party rule, now apply to the merged scheme and ERIS alike.

It can. The PAYE and NIC cap does not apply if the company is creating or managing its own IP, mainly through employees, and connected-party EPW and contractor costs are no more than 15% of qualifying expenditure. Heavy use of connected subcontractors can therefore remove the exemption and put the cap back in force.

HMRC will ask for evidence of the decision and planning. If the documents from the time support your account, the answer is straightforward. If they do not, the contracted-out costs may be removed from the claim. We prepare the evidence file with the claim, and we can defend the point in an enquiry if it is raised.