Subcontractor Rules and Contract Risk: Who Holds the Right to Claim Under Merged Rules?
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One of the more complex areas of the Merged R&D Scheme is contracted-out R&D.
For businesses operating through supply chains — including commercial construction, manufacturing and software development — it can sometimes be unclear whether the business commissioning the work or the contractor carrying it out is entitled to claim R&D tax relief.
The answer depends on the nature of the work, the contractual arrangements and who intended for the R&D to take place.
Getting this distinction right is important, particularly where more than one business is involved in the same project.
Start With the Contract
A key consideration is whether the R&D was intended and contracted for as part of the project.
Where a client engages another business specifically to undertake R&D or solve a particular technological or scientific problem, the client may be the party with the relevant claim.
By contrast, a contractor carrying out standard work may encounter an unforeseen technological or scientific uncertainty during the project. If the contractor then undertakes qualifying R&D to resolve that uncertainty, the position can be different.
In simple terms:
R&D specifically commissioned by the client
→ The client may have the relevant claim, subject to the wider eligibility requirements.
Unexpected technical uncertainty encountered by the contractor
→ The contractor may potentially have its own qualifying R&D activity.
The contractual wording, commercial reality and nature of the technical work all need to be considered together.
How Can This Work in Practice?
Consider three different commercial situations.
Developing Something New
A client commissions an engineering business to develop a novel prototype to address a specific technological problem.
If the R&D forms part of what the client contracted the engineering business to deliver, the client may be the party with the relevant claim.
Bespoke Software Development
A business engages an external UK developer to create bespoke software involving new algorithms under the business’s technical direction.
The contractual arrangements and the precise nature of the work need to be considered when determining which party is entitled to claim.
Where qualifying subcontracted R&D expenditure is included in a claim, the relevant expenditure rules and applicable restrictions must also be considered.
An Unexpected Technical Challenge
A contractor is engaged to construct a standard building.
During the project, unstable ground conditions create an unexpected technical challenge. The contractor must investigate and develop a new piling approach to overcome the uncertainty.
Here, the R&D may arise from the contractor’s own work rather than from an R&D requirement specified by the client.
Avoiding Duplicate Claims
Where multiple businesses contribute to the same R&D project, it is important that the parties understand their respective roles.
Two businesses should not simply claim the same R&D expenditure because both contributed to the project.
Before submitting a claim, businesses should consider:
- What was the client actually paying the contractor to do?
- Was R&D specifically required as part of the contract?
- Who identified the technological or scientific uncertainty?
- Who undertook the work to resolve it?
- Who carried the relevant financial and technical risk?
- What does the contract say about the work being undertaken?
Keeping clear documentation around these points can help demonstrate how the R&D activity arose and why the relevant business is claiming it.
Overseas Subcontracted R&D
The current R&D rules also place restrictions on certain overseas subcontracted R&D expenditure.
Broadly, overseas expenditure will not qualify unless specific conditions are met, including circumstances where the R&D could not reasonably be undertaken in the UK because of relevant geographical, environmental or other conditions.
Businesses using overseas contractors should therefore consider where the R&D is physically carried out rather than simply where the contractor is incorporated or based.
This should form part of the wider review of R&D expenditure before a claim is submitted.
What Should Businesses Check?
For businesses regularly working with contractors, suppliers or development partners, R&D eligibility should form part of the wider project documentation.
Useful records can include:
Contracts and statements of work
Document what each party was engaged to deliver and whether R&D was specifically commissioned.
Technical records
Keep evidence of the technological or scientific uncertainty, the work undertaken and the outcome.
Subcontractor information
Record who carried out the work and where the relevant R&D activity took place.
Financial records
Maintain appropriate records linking qualifying expenditure to the relevant R&D project.
Intellectual property and risk arrangements
Understand who owns the resulting IP and how the commercial and technical risks associated with the work were allocated.
The Bottom Line
Contracted-out R&D can become complicated when several businesses contribute to the same project.
The fact that a business paid for R&D to be carried out does not, by itself, answer the question of who can claim. The contractual arrangements, the intention behind the work and the circumstances in which the technological or scientific uncertainty arose all need to be considered.
For businesses using contractors as part of their R&D projects, reviewing these arrangements early can help establish a clearer evidential trail and reduce the risk of duplicate or unsupported claims.
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