CIRD84250: Categories of Qualifying Expenditure: Subcontracted Activities

The HMRC Corporate Intangibles Research and Development Manual (CIRD) section CIRD84250 outlines the categories of qualifying expenditure and the meaning of subcontracted.

The guidance on the CIRD84250 page has been updated to reflect HMRC’s position following recent First-tier Tribunal rulings. When a company undertakes activities on behalf of another party under a contract, any related expenditure is not eligible for R&D tax relief. This rule is designed to ensure that both parties to the contract cannot claim relief for the same R&D work.

The contract terms between the company and the principal (the customer who has outsourced the work) are not the only factor to consider. For example, a clause stating that “any R&D undertaken under the contract belongs to the principal” does not automatically mean the R&D was contracted out, particularly if other evidence suggests otherwise.

Similarly, if a contract does not mention R&D, this does not necessarily mean that R&D was not subcontracted to the claimant company. It is important, where possible, to consider the wider context, including other correspondence, related agreements, and what actually happened in practice.

Factors to Consider

There is no definitive test to determine whether R&D activities have been contracted out, but several key factors can help inform the assessment. These should be considered together, based on the contract, supporting documents, and how the work was actually carried out.

Purpose of the R&D: If the R&D is merely incidental to supplying a product or service, it is unlikely to be considered contracted out. On the other hand, if it is clear that the principal required R&D to be carried out, either explicitly in the contract or implied by the nature of the work, it is more likely that the R&D was contracted to the claimant company.

Autonomy and Control: Limited autonomy in how the R&D is conducted suggests the work was contracted out. If the principal sets detailed specifications, provides guidance, or is involved in the day-to-day R&D, this points to a contractual R&D relationship.

Financial Risk: A company will often be able to argue that it has taken on some financial risk. However, the presence of financial risk alone is not a strong indicator that the R&D was not contracted out. In contrast, a lack of financial risk is a stronger sign that the R&D was contracted to the company. For example, if it is clear from the start that the principal is commissioning R&D, the contract may include terms ensuring the company is paid regardless of the outcome.

Intellectual Property (IP): The company does not hold rights to the IP developed through the R&D project. If the principal owns the resulting IP and the company has no right to use it beyond the contract, this supports the conclusion that the R&D was contracted out.

SME Scheme – Activities contracted out by the SME

A company can subcontract all or part of its R&D activities to another party. This occurs when a formal contract exists for work that forms either a complete R&D project or a distinct part of one. However, not all contracts involving support services count as subcontracted R&D.

If a company claims that it has subcontracted some or all of its R&D activities, it should be able to explain to HMRC the scientific or technological advance being pursued and how the subcontractor contributed to achieving it.

In some cases, new products must undergo legally required standard tests. Where these tests relate to products developed through R&D, the testing can be treated as subcontracted R&D.

Aside from such exceptions, the company should be able to show that it had a significant degree of control and oversight over the subcontractor’s work.

For specific examples relating to the categories of qualifying expenditure and subcontracted activities visit: CIRD84250 – R&D tax relief: categories of qualifying expenditure: subcontracted activities – meaning of subcontracted – HMRC internal manual – GOV.UK