What’s Happened?

HMRC has refreshed its stance on how subcontracted and subsidised R&D costs are treated. The updated guidance moves away from the blanket rule that prevented SMEs from claiming R&D relief when working as subcontractors, now opting for a more nuanced, case-by-case assessment. The update also addresses issues surrounding subsidised expenditure, ensuring that companies receiving subsidies aren’t inadvertently penalised in their R&D claims.

Why Did This Happen?

Recent First-Tier Tribunal decisions – notably in the Collins Construction Ltd and Stage One Creative Services cases – highlighted that HMRC’s earlier approach was too rigid. The tribunals ruled in favour of the claimants, prompting HMRC to update its guidance to reflect a fairer, more flexible interpretation of what constitutes subcontracted R&D and subsidised expenditure.

Why Is This Important?

This update is a major development for the R&D community:

Clarity: HMRC now advises that each case should be assessed individually, taking into account several factors.

Flexibility: The new guidance considers elements like contract wording, customer awareness of R&D needs, the degree of autonomy of the subcontractor, financial risk, and IP ownership.

Impact: Although the changes still lean in favour of the customer in some respects, the more detailed, case-by-case approach – considering factors such as the contract specifics, the level of control, financial risk, and IP ownership – could lead to fairer outcomes for companies that were previously disadvantaged under the old rules.

Impacts on R&D Tax Claimants

For businesses and advisers involved in R&D tax claims, the update means:

• Enhanced Scrutiny: Caseworkers will review existing enquiries and ongoing claims using the new criteria.

• Documented Evidence: Claimants will need to ensure they have clear evidence such as contracts, emails, and meeting notes to support the claim.

• Potential for Change: Businesses with past claims rejected under the old rules might see new avenues for review, though it remains to be seen how HMRC will handle cases that are past amendment deadlines.

Next Steps

If your business or clients are involved in R&D claims:

• Review Your Documentation: Double-check that all supporting evidence clearly reflects the nature of the R&D work, the contractual details, and the respective roles of the parties.

• Stay Informed: Keep an eye on further communications from HMRC or professional bodies as caseworkers begin applying the new guidance.

• Seek Expert Advice: Consider a review of your claim documentation by an R&D specialist to ensure that your evidence aligns with the updated requirements.

This update marks a significant shift in the R&D tax relief landscape, aiming to address past challenges and create a more balanced framework for evaluating claims. We’ll continue to monitor how these changes unfold and will update you as more details become available.

If you have any further questions about on how subcontracted and subsidised R&D costs or R&D tax relief in general, please get in touch with ABGi. A representative will get back to you to discuss your unique needs and explain how we can assist.