CIRD84250: Categories of Qualifying Expenditure: Subcontracted Activities

HMRC has significantly updated its guidance on subcontracted activities under the SME Research and Development (R&D) tax relief scheme. The revised version of section CIRD84250 in the Corporate Intangibles Research and Development Manual reflects an important change in how companies must assess whether their R&D expenditure qualifies for relief. This update follows recent First-tier Tribunal decisions and introduces a more detailed, fact-based approach to determining whether R&D activities have been “contracted to” a company. This assessment is a key factor in establishing eligibility for relief.

A Shift in Approach: From Rules to Context

Previously, HMRC’s position was relatively straightforward. If R&D was carried out under a contract, the activities were generally presumed to have been contracted to the company and were therefore ineligible under the SME scheme. However, R&D performed after the main contract was fulfilled could still qualify. This earlier interpretation was legalistic and lacked practical guidance for more complex scenarios.

The revised guidance moves away from a rules-based approach and now encourages a broader review of the circumstances. HMRC emphasises the importance of considering all relevant facts, rather than relying solely on the wording of the contract. The goal is to determine whether the R&D was genuinely undertaken for the claimant company’s own purposes, rather than as a service to a customer.

Factors That Influence Eligibility

There is no single test to decide whether R&D activities are subcontracted. HMRC outlines several key factors that must be considered together when making this determination:

• Purpose of the R&D: If the R&D is incidental to the delivery of a product or service, it is unlikely to be treated as subcontracted. On the other hand, if the customer explicitly or implicitly required R&D to be carried out, this increases the likelihood that the work was subcontracted.
• Contract Terms and Practical Context: A contract clause stating that “any R&D undertaken belongs to the customer” does not automatically mean the work was subcontracted. Similarly, the absence of any mention of R&D in a contract does not prove that no subcontracting occurred. The wider context should be considered, including other agreements, correspondence, and how the work was actually performed.
• Autonomy and Control: Limited autonomy in how the work is conducted suggests that the R&D was subcontracted. If the customer provides detailed technical specifications or is involved in day-to-day decision-making, this supports the view that the work was done on the customer’s behalf.
• Financial Risk: The presence of financial risk may indicate that the R&D was not subcontracted. However, this factor alone is not decisive. A complete lack of financial risk, such as guaranteed payment regardless of outcome, is a stronger indication that the company was performing subcontracted work.
• Intellectual Property (IP) Rights: If the company does not retain any rights to the IP resulting from the R&D, and the customer owns the output entirely, this points to subcontracting. Retaining only general “know-how” is not sufficient unless it reflects meaningful ownership of the outcomes.

Tribunal Influence and Practical Examples

The update reflects HMRC’s attempt to align with recent tribunal rulings, which have reinforced the importance of case-specific analysis. The guidance now includes three fictional case studies involving Companies A, C, and E. These examples explore different scenarios in which R&D may or may not be subcontracted, depending on how the work was structured, who directed it, and who benefited from the results.

These case studies highlight the need to understand the principal’s expectations, the contract terms, and how the R&D was executed in practice.

Guidance for HMRC Caseworkers

Alongside the revised interpretation, HMRC has also issued operational guidance to its caseworkers. Officials reviewing claims are encouraged to request detailed supporting evidence. If claimants are unable or unwilling to provide the necessary documentation, caseworkers may request permission to contact subcontractors or issue third-party notices to gather information.

Subcontracted R&D by SMEs

The updated manual also clarifies how R&D subcontracted by SMEs is treated. A company may subcontract all or part of its R&D activities, provided that the subcontracted work relates to a clearly defined R&D project and that the SME maintains control over the direction of the project.

For example, if a building contractor claims relief for a novel foundation technique and subcontracts its implementation, the contractor must demonstrate that it led the development of the technique, rather than simply hiring someone to do standard site work.

In some situations, testing activities that are legally required before bringing a new product to market may also qualify, especially if the testing is part of a broader R&D effort.

Summary

The updated guidance in CIRD84250 represents a significant step toward a more flexible and context-sensitive interpretation of the R&D tax relief rules. It places greater emphasis on facts, control, and commercial reality, rather than just contract language. This change provides both claimants and HMRC staff with clearer tools for evaluating whether R&D work qualifies under the SME scheme.

Companies should ensure they maintain thorough documentation and understand the contractual and practical framework of their R&D work. This will be essential for supporting claims and avoiding disputes.

For the complete guidance and case examples, visit the official HMRC manual at: CIRD84250 – R&D tax relief: categories of qualifying expenditure: subcontracted activities – meaning of subcontracted – HMRC internal manual – GOV.UK

Please get in touch with our TBAT team today if you would like any help understanding the information provided in the CIRD84250 manual.