For accounting periods beginning on or after 1 April 2024, changes to the R&D scheme will affect how contracted out costs are handled. Contracted out R&D occurs where part of an R&D activity is contracted out to another party that has the expertise and the equipment to undertake R&D more efficiently. This rule change could impact your ability to submit an R&D claim, particularly if your business regularly contracts out work or undertakes contracted out projects. 

There are three conditions for R&D to be considered contracted out:

• Contractual Agreement: A formal contract between the claimant and another party for the R&D activities.  

• Inclusion of R&D: The activities specified in the contract must clearly involve R&D.  

• Intention or Contemplation: It is reasonable to assume, based on the contract, that the business intended or contemplated that R&D would be undertaken.

Under the new rules, both SME’s and large companies can claim under the R&D scheme, provided that they are the party making the decision to undertake R&D activities. This means that either the customer or the subcontractor can claim for contracted-out R&D, provided they “intended or contemplated” that R&D would be carried out. However, if the customer is ineligible for the R&D scheme, such as an overseas customer who is not a UK taxpayer, then the contractor has the opportunity to claim.  

As a claimant under the scheme, it is crucial to familiarise yourself with the upcoming rule change as HMRC will require strong evidence to determine who intended or contemplated to undertake R&D. ‍

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How is 'intended or contemplated' defined by HMRC?

‍Whilst there is no legal definition of the meaning of ‘intention or contemplated’, HMRC expects businesses to have a clear understanding and articulation of the R&D activities outlined in the contract. Therefore, the terms and language used within your contracts are crucial for determining eligibility for tax relief.  

Under the R&D scheme, simply understanding that R&D might be needed to fulfil the contract is not enough. The claimant must have a specific understanding of the type of R&D required. Your contract and related documents should clearly describe the expected R&D activities. It’s essential that the intention or contemplation of R&D is evident at the time the contract is entered into. Further, the claimant must have the technical capability to understand and articulate the nature of the R&D which is required.  

Ensuring that your contracts are clear and comprehensive will help establish your eligibility for R&D tax relief and strengthen your claim.

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‍What evidence can strengthen my R&D claim?

‍A contract is not the only evidence that HMRC will evaluate when determining R&D eligibility. When assessing who can claim for the R&D activities, HMRC will consider various surrounding circumstances. These include the ownership structure of parent companies, financial risk for the R&D, and which party directs the R&D activities. To support your R&D claim, it is essential to provide comprehensive evidence surrounding the R&D activities conducted. Generally, the more detailed and supportive the documentation, the stronger your claim will be. Supporting documentation can include:  

• Intellectual Property (IP) Ownership: Documentation showing IP rights assigned to the customer.

• Internal Project Documents: Detailed outlines of the project and how specific R&D activities are crucial for its success.

• Communication Records: Correspondence that indicates the customer’s anticipation of R&D requirements.

• Technical Expertise: Evidence that the customer possesses or has access to relevant technical expertise.

• Internal Records: Documentation reflecting the customer’s responsibility for the R&D aspects of the project.

For innovative projects that are either contracted out by or to your firm, it’s essential to review all supply chain arrangements carefully. This should include a full assessment of subcontractor discussions, contracts, and any project documentation related to the R&D activities. Overall, a strong paper trail will help to support a robust R&D claim.

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‍How can we help?

‍Innovative projects often involve complexities that can create uncertainties about which party is entitled to claim R&D tax relief. Despite these ambiguities, HMRC expects a well-supported argument, thorough documentation, and clear evidence of decision-making and project planning.

At Folio Partners, we specialise in guiding you through the R&D claim process to help you navigate complex contractual agreements. We will meticulously review contract terms to ensure that all claimable costs are picked up within the claim period. Our expert advisers are adept at navigating the changing R&D rules and ensuring compliance with the latest legislation, resulting in a strong and robust R&D report.  

Contact us today to discover how we can streamline your R&D claim process.