HMRC has sought to develop a clearer definition for contracted-out R&D activities, which will apply to claims made for accounting periods starting on or after April 1, 2024. HMRC states that the main principle is that the company making the decision to undertake R&D should be able to claim. This means that, when R&D activities are subcontracted, the customer, not the contractor, will generally have the right to claim, unless the customer is not subject to UK tax.
“Contemplated” R&D refers to the stage of considering, planning, or foreseeing R&D activities before they are officially contracted out. For R&D tax claims, this term has specific implications, particularly regarding subcontracted R&D work. For tax relief claims, this means that the company claiming the R&D tax credits must show that they intended or expected R&D to happen even before engaging a contractor.
The main idea behind the “contemplation” rule is to determine who has the right to claim R&D tax credits: the company (the customer) or the contractor doing the work. To qualify, the company must be able to prove that R&D was anticipated before they hired the subcontractor and that the scope of work was clearly linked to resolving technical uncertainties or challenges.
For example, if a company (let’s call it Company A) needs a custom piece of equipment and hires a contractor (Company B) to make it, Company A must show that they expected R&D to be involved in developing the equipment, before the work began. If there’s no clear evidence of this, then it might be Company B, the contractor, who can claim the tax relief instead.
In short, “contemplated” R&D is about proving that R&D was part of the plan from the beginning, and not just something that was figured out later on after the work was already started. It’s all about who actually holds the responsibility and control over the R&D process.
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