Updated guidance on subcontracting R&D activities and subsidised expenditure
Kanika Mishra Pathak · Posted on: May 23rd 2025 · read
Following recent rulings in favour of claimants at FTTs, HMRC have published new guidance for subcontracted activities.
In summary, the guidance suggests that the terms of the contract between company and principal (the person which has contracted out the work, also known as the customer) are not the only factor to be considered. Instead, the following factors should be evaluated (listed in order of the weight likely to be attached to them as per HMRC):
- If the R&D is incidental to the supply of a product or service, it is not contracted out i.e. it’s not clear from the contract or ‘surrounding circumstances’ that the principal was aware R&D would be necessary
- If the company has a limited degree of autonomy, R&D is more likely to have been contracted out i.e. the principal, when contracting out R&D, was specific about nature and objectives of work to be undertaken, provided direction or guidance, or exerted a degree of control over the company
- The company has limited financial risk in undertaking the work i.e. the contract or other correspondence or agreements indicate that the company undertaking R&D activity would be taking little or no financial risk
- The company does not retain IP arising from the R&D project i.e. where IP is owned by the principal and the company undertaking R&D cannot use it.
This is broadly in line with the guidance issued in respect of the merged scheme, which comes into force for accounting periods starting on or after 1 April 2024 and suggests that the ‘decision maker’ that bears the risk will be eligible for relief.
Also published, is guidance in respect of subsidised expenditure.
Research & Development
Read more about Research & DevelopmentRead moreThe following are examples of situations where work has not been subsidised:
- Where a company carries out R&D on its own account and subsequently sells goods or services developed as a result of that R&D, receipts from those sales will not be considered to meet the expenditure incurred on the R&D.
- Where a company carries out R&D on its own account, receipts from the sale of goods or services which existed prior to the R&D being undertaken will not be considered to meet expenditure incurred on the R&D.
- Where a company obtains finance on commercial terms this will not be considered to meet the company’s expenditure.
- Where a company receives payment under a contract, but the R&D activities were not contracted to the company.
The final point is crucial and means that for many companies that carry out R&D as part of a wider project where the R&D is incidental to the supply (which is common in the construction industry for example), the work is less likely to be deemed subsidised. For SME companies this means they can continue claiming under the SME scheme until the merged scheme is introduced.
Whilst the above provide more clarity than the previous guidelines and are less restrictive than HMRC’s stance prior to the FTTs, it is worth noting that the guidance above is still not aligned with the real nature of contractual relationships between the principal and the subcontractor. The guidance could still be open to interpretation and it will remain to be seen whether this truly resolves the ambiguity surrounding subcontracted R&D.
Purely by virtue of its existence however, this new guidance will come as a relief to companies who have had enquiries pending with HMRC for a number of months.
Take action
Review the new guidance to ensure your R&D claims align with HMRC's criteria. If you're unsure about your eligibility or have pending enquiries, contact us for expert advice and support in navigating these changes.
