28 Jun 2024

With new rules for contracted-out R&D, what does ‘contemplated’ mean?

Yasmin Dalton

There are new rules for contracted-out R&D but what does ‘contemplated’ mean?

Collaboration between companies carrying out R&D is not new. When a company faces uncertainty on a project, it will usually contract out a portion of the R&D work to a company that can help to resolve it. It is this area, however, that has been a bone of contention within the world of R&D tax credits for quite some time. In fact, HMRC identified contracted-out R&D as an area most prone to error when determining which R&D tax scheme to use. In an attempt to mitigate this, and reduce the levels of error, the RDEC and SME scheme have been fused to produce the shiny new merged scheme, effective for A/Ps starting on or after 1st April 2024.

The goal of this new merged R&D tax relief scheme is to provide much-needed clarification on the rules relating to subcontracting expenditure. Historically, this has been a challenge for companies as it has not been clearly defined in the tax legislation.

At present, under the SME R&D tax relief scheme, payments to subcontractors attributable to R&D undertaken on behalf of the company are qualifying expenditures. Conversely, under the RDEC scheme, subcontracted costs may only be claimed where the contracted work is being carried out by an individual, a partnership, or a qualifying body such as a charity, higher education institute or scientific research organisation.

Contemplating R&D

So what does this mean for the customer?

To claim for contracted activities the customer must be able to demonstrate that they ‘intended’ or contemplated’ that R&D would need to be done. Evidence of this could include a contract or correspondence describing the R&D in-depth.

Customers will now need to consider the wider scope of any contracted-out development activities before they enter into any agreements with contractors. For example, a customer might know that they need a piece of bespoke tooling, but can they accurately describe the R&D necessary for its development before the contractor begins the work?

If the customer is unable to show that they contemplated the R&D, for example, if they only provide a contract for the provision of goods and services, then this would not be enough for them to claim. In this case, it could potentially enable the contractor to make the claim instead. Under the new rules, this scenario is not contracted R&D because the decision to initiate the R&D was made by the contractor, not the customer. It also does not matter that the R&D was funded by the customer as there is no restriction on claiming for funded/subsidised R&D activity anymore.

HMRC have provided several examples where the question of contemplation may arise. I’ve taken the important points from each example given and listed them below – for clarity, in each example, Company A is the customer and Company B is the contractor.

  • If there is no mention of R&D in the contract, Company A cannot claim, but Company B can.
  • If there is no contract, Company B is still able to claim for any R&D it does despite the fact A funded it, as there is no restriction on claiming for funded/subsidised R&D activity anymore.
  • High-level wording in a contract that R&D was required would not be enough to satisfy the contemplation rule. This eliminates the risk of company A adding this in to reserve themselves the right to claim (thereby denying company B the right).
  • Although Company A understands that R&D will be required to make a component and that component will form a vital part of its R&D project, it does not possess the specialist expertise that Company B has. Therefore, R&D could not have been contemplated by company A and it is company B who held risk when carrying out R&D and are able to claim.
  • Company A and Company B can both claim R&D as long as the R&D elements relate to entirely different projects. Company A can claim the contracted costs and Company B can claim for the R&D activities related to the contracted work.

Contemplating the contemplation

From the examples, we can see that contemplation, in this context, needs to show substantial intention, and requires appropriate expertise. Therefore, it should be more than a minor or fleeting consideration. The R&D that is envisaged is more than mere belief, or even knowledge that R&D will be required per CTA09/1133(2)(c). It must go beyond the awareness that R&D will take place and requires a specific appreciation of what R&D will be done.

High-level wording in a contract that R&D was required would not be enough to satisfy (1133(2)(c)) as this could be added by the customer who wanted to reserve itself the right to claim (thereby denying the contractor the right). In this case, the customer would struggle to explain in detail the R&D to be carried out or explain why it was needed. This shows that R&D was not contemplated or intended by the customer.

contracted-out R&D, man unsure what is contemplated
But what if it’s still unclear?

The examples given by HMRC are pretty straightforward. In the real world, however, things can often be more complex and confusing. In these cases, there are other factors to assess when considering who contemplated the R&D and who has the right to claim. These factors include:

  • Who has the intellectual property ownership?
  • Who holds the financial risk in undertaking the work?
  • Is there autonomy in how the work is executed? Is it customer-led? What does the decision-making process look like?
  • By what means will the R&D be exploited?
  • Does the motivation to undertake R&D flow from the customer’s wider strategy or an immediate challenge recognised by the contractor?
  • Who has the experience and seniority of decision-takers (competent professionals)?
  • What is the nature of the parties (is it evident that company B specialises in providing R&D services and the contract is typical of those R&D activities)?


This blog has sought to provide much-needed clarification on HMRC’s new contemplation rule. The many real-world nuances that are present in R&D collaboration could make this a confusing topic to navigate. That is where expert R&D advisors, like TBAT Innovation, will be an essential extension of your team, to best advise on project eligibility and to support you throughout the R&D tax claim process.

If you like to get in touch regarding any of the points raised, or would like to speak to our expert R&D Tax Credits team, book a free 1-2-1 consultation today.

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