Contracted Activities in R&D Projects: What are they?
Contracted activities are a vital component of many research and development (R&D) projects. These activities are considered subcontracted when a company engages an external contractor to perform tasks that form part of a larger R&D project. Even if the subcontracted work isn’t R&D in isolation, it can still qualify as R&D expenditure for the company. For instance, a company might subcontract analytical testing to a specialised firm. While the testing itself may be routine, it qualifies as R&D because it supports a broader R&D project.
Key Points: Contracted Activities in R&D Projects
Qualifying Expenditure
Expenditure on contracted activities qualifies under the SME scheme and, from 1 April 2024, the merged RDEC scheme. However, claims under the old RDEC scheme can only include contracted costs if they are subcontracted to a qualifying body (e.g., university, contract research organisation), an individual, or a partnership. Additionally, from 1 April 2024, expenditure on overseas contractors generally does not qualify, with some exceptions.
Connected vs. Unconnected Contractors
The relationship between the contractor and the claimant company affects the qualifying expenditure:
- Unconnected Contractors: Only 65% of the expenditure paid to an unconnected contractor can be treated as qualifying expenditure. For example, if £50,000 is paid to a contractor, only £32,500 can be considered for the R&D calculation.
- Connected Contractors: If the contractor is connected to the claimant company, the company can claim the lower of the qualifying payment for staff made to the staff provider or the actual cost incurred by the staff provider.
Calculating R&D Apportionments for Contracted Activities in R&D Projects
When subcontracted work is part of a larger R&D project, it doesn’t need to be R&D in isolation to qualify. The cost should be apportioned relative to the R&D project. For example, if a contractor performs validation testing solely for an R&D project, 100% of the cost can be claimed (subject to connected/unconnected restrictions). If the contractor’s work spans both R&D and non-R&D projects, the cost must be apportioned accordingly.
Detailed Explanation of Contracted Activities
What Constitutes a Contracted Activity?
A contracted activity occurs when there is a formal agreement between a company and an external contractor to carry out specific tasks. These tasks, although not necessarily R&D in isolation, contribute to the overall R&D project. For example, a company might need specialised machinery for analytical testing, which it does not possess. By subcontracting this task to a firm that has the necessary equipment, the company ensures that the testing, although routine, supports its R&D efforts.
Restrictions on Expenditure
From 1 April 2024, the rules around qualifying expenditure for contracted activities will change. Under the SME scheme and the merged RDEC scheme, expenditure on overseas contractors will generally not qualify, with some exceptions. This change aims to encourage companies to engage local contractors and support domestic R&D activities. Claims under the old RDEC scheme can only include contracted costs if they are subcontracted to a qualifying body, an individual, or a partnership.
Connected vs. Unconnected Contractors: A Closer Look
The distinction between connected and unconnected contractors is crucial for determining qualifying expenditure. If the contractor is not connected to the claimant company, only 65% of the expenditure can be treated as qualifying. For instance, if a company pays £50,000 to an unconnected contractor, only £32,500 can be considered for the R&D calculation. Conversely, if the contractor is connected to the claimant company, the company can claim the lower of the qualifying payment for staff made to the staff provider or the actual cost incurred by the staff provider.
Apportioning Costs in R&D Projects
When subcontracted work forms part of a larger R&D project, it is essential to apportion the costs accurately. The cost should be relative to the R&D project it supports. For example, if a contractor is only performing validation testing for an R&D project, 100% of the cost can be claimed, subject to connected/unconnected restrictions. However, if the contractor’s work spans both R&D and non-R&D projects, the cost must be apportioned to reflect only the R&D-related activities.
Practical Examples
- Analytical Testing: A company developing a new material might subcontract analytical testing to a specialised firm. The testing itself is routine, but because it supports the R&D project, it qualifies as R&D expenditure.
- Software Development: A tech company might subcontract part of its software development to an external firm. Even if the subcontracted work involves routine coding, it qualifies as R&D because it contributes to the development of a new software product.
How FI Group Can Help
At FI Group, we specialise in helping companies navigate the complexities of R&D tax relief claims. Our team of experts can assist you in identifying qualifying expenditures, ensuring accurate apportionments, and maximising your claims. We provide comprehensive support throughout the claim process, from initial assessment to submission, ensuring compliance with all relevant regulations. With our extensive experience and tailored approach, we help you unlock the full potential of your R&D investments.
Our Services Include:
- Initial Assessment: We evaluate your projects to identify qualifying R&D activities.
- Detailed Analysis: Our team conducts a thorough analysis of your financial reports to ensure all eligible expenditures are included.
- Claim Preparation: We prepare and submit your R&D tax relief claim, ensuring all documentation meets HMRC requirements.
- Ongoing Support: We provide continuous support and advice to help you optimise your R&D tax relief claims in the future.
For further assistance or to discuss your specific case, feel free to contact us.