HMRC Updated Guidance on Subcontracted and Subsidised Expenditure 

Subsidised Expenditure (SME Scheme Only)

HMRC has revised its guidance on subsidised expenditure following recent tribunal decisions. Under the SME R&D tax relief scheme, expenditures that are subsidised do not qualify for relief. If a project receives State Aid funding, none of its expenditures can qualify for SME relief. However, non-State Aid grants or subsidies may result in partial relief under the SME scheme and the large company scheme (or RDEC). 

Expenditure is also considered subsidised if it is met by another person, directly or indirectly. Payments received from a principal may constitute subsidised expenditure if linked to R&D activities, but incidental R&D within a contract may still qualify for relief.

HMRC has clarified that standard sales revenue, commercial finance, and unrelated payments do not constitute subsidised expenditure. 

Subcontracted R&D Activities

HMRC has clarified that expenditures related to activities contracted to a company by another party do not qualify for SME R&D relief. Whether R&D is subcontracted depends on contract terms and the nature of the agreement. Factors indicating subcontracted R&D include: 

• The principal required R&D to be conducted. 

• The company had limited autonomy in carrying out the work. 

• The principal exerted control over the work. 

• The company bore little financial risk. 

• The principal retained intellectual property (IP) rights. 

Examples illustrate that R&D prompted by customer feedback, with full autonomy retained by the company, is not subcontracted. However, if a company is required to conduct R&D to meet contractual specifications, it is considered subcontracted R&D. 

Distinguishing Subcontracted and Subsidised Expenditure

A company may contract out some or all of its R&D. Payments for general support, joint research, material purchases, or expert advice do not qualify as subcontracted R&D. However, when R&D is specifically contracted out in exchange for payment, it qualifies as subcontracted expenditure, affecting eligibility for relief. 

Key Differences Between SME and Large Company Schemes

SMEs cannot claim relief on subcontracted R&D, while large companies (or under RDEC) may claim for subcontracted R&D in specific cases. Companies must provide detailed explanations and supporting evidence to HMRC when claiming R&D tax relief on subcontracted or subsidised expenditures. 

Further details of the updated HMRC guidance: 

CIRD81650 – R&D tax relief: conditions to be satisfied: subsidies (SME scheme only) 

CIRD84250 – R&D tax relief: categories of qualifying expenditure: subcontracted activities – meaning of subcontracted 

Speak to our experts

Navigating HMRC’s changing guidance on subsidised and subcontracted R&D expenditure can be challenging. Our TBAT Innovation R&D experts can help businesses understand the changes and complex rules, ensuring they maximise their eligible claims while remaining compliant with HMRC’s guidance. Whether assessing subsidised expenditures, determining subcontracted R&D eligibility, or structuring claims correctly, expert advice can make a huge difference. Contact us today