The merged scheme has introduced new rules and changes to be aware of. A significant one for those companies that have previously claimed under the SME scheme is changes to contracted out R&D, more commonly referred to as the subcontractor rules.
Under the previous rules, Small and Medium sized Enterprises (SMEs), were able to claim 65% of the costs of qualifying subcontractor payments. Those claiming under RDEC (Research and Development Expenditure Credit) could only claim for the costs of outsourced R&D when the work was subcontracted to individuals, partnerships and a limited number of qualifying bodies.
New rules from 1 April 2024
The new contracted out rules are modelled on the SME scheme and so there is an opportunity for companies previously in the RDEC regime to get extended relief from the changes.
There are some critical changes to the original SME scheme rules though and SME claimants of subcontracted expenditure should take great care to ensure subcontractor costs will continue to qualify for relief under the merged scheme.
Under the new merged scheme all companies can claim for subcontracted R&D when the following three conditions are met;
- There must be a contract between the two parties (not necessarily for R&D);
- To meet the obligations under the contract, R&D work is actually undertaken by the contractor;
- It is reasonable to assume, having regard to the terms of the contract, and any surrounding circumstances, that the person intended or contemplated when entering into the contract that research and development of that sort would be undertaken in order to meet those obligations.
The third condition in particular should be considered in detail by all claimants under the merged scheme as, to fulfill this, it is vital that the principal in the arrangement has a competent professional who is involved in the contract negotiation and is in a position to articulate the R&D required.
In addition, HMRC will be considering the following factors when determining who can claim for R&D;
- Who will own any intellectual property (IP) created?
- Who bears the financial risk in undertaking the work?
- Who oversees the R&D – does the contractor have limited autonomy?
- Who has the ability to decide how the R&D is ultimately to be exploited?
- Does the decision to undertake the R&D flow from the customer’s wider strategy or an immediate tactical challenge recognised by the contractor?
- Is it evident that the contractor specialises in providing R&D services and the contract is typical of those R&D activities?
Planning
These rules are another example of how HMRC are encouraging companies to forward plan their R&D rather than it being a later consideration during year end preparations. To enable a valid claim, contemporaneous documentation and evidence of how the above conditions are met should be prepared and retained. It is not enough to have a blanket clause in all contracts stating that you, as principal, will be entitled to claim R&D or retain the IP.
It is vital to have a competent professional involved at the outset, preparing the subcontractor contract and driving the R&D.
We would advise clients to review existing contracts in order to understand whether the associated costs will indeed qualify for subcontracted R&D.
If you have any queries and would like assistance please contact Lucy Lloyd on 01633 653177 or email Lucy.Lloyd@kilsbywilliams.com. Alternatively, please contact your usual advisor on 01633 810081 or email info@kilsbywilliams.com
