Contracted-out R&D is one of the most misunderstood areas in the UK R&D tax relief system. Under the merged RDEC scheme that applies to accounting periods from April 2024, the entity that contracts out R&D to another party is the one that claims the relief. The entity physically performing the work cannot claim RDEC on that work if it was done under contract. This is a deliberate policy choice and it has real consequences for small contractors and development agencies who previously claimed under the old SME route.
The Terminology Problem
HMRC's R&D guidance uses "contractor" and "subcontractor" in a specific way that is the opposite of everyday usage. In R&D tax terms:
- The contractor is the company that contracted out the R&D. This is the customer in commercial terms.
- The subcontractor is the company that physically performed the R&D under the contract. This is the service provider or developer in commercial terms.
So when your customer tells you "the R&D is contracted out," they mean they are the contractor in HMRC's terminology. They commissioned the work and they are the ones who can claim RDEC on it under the merged scheme rules.
The Merged Scheme Rule: Contractor Claims, Not Subcontractor
Under HMRC's CIRD manual at CIRD89700 onwards, the merged RDEC scheme provides that where R&D is contracted out, the company that contracted it out can claim RDEC on the payments made to the subcontractor (at 65% of the payment, for unconnected subcontractors). The subcontractor itself cannot claim RDEC on the same work.
This is a clean rule and its purpose is to prevent the same R&D expenditure from generating relief twice. If the customer can claim 65% of what they paid you as qualifying expenditure, and you could also claim on the full cost of delivering the work, the same R&D would generate RDEC for both parties.
How it worked differently under the old SME scheme
Under the pre-April 2024 SME regime, a small contractor that was not itself the SME claimant could sometimes claim SME relief on its own costs even where those costs were funded by a customer contract. The old rules were more complex, with different treatment depending on whether the customer was an SME or a large company. The merged scheme eliminated this complexity by making the contracting party the exclusive claimant in all cases from April 2024.
When You, as the Contractor, Can Still Claim
Being the party that performs the physical work does not mean you can never claim R&D relief. There are two situations where you may have your own valid claim even where a customer is claiming on the same overall project.
Your own independent R&D. If you incur qualifying R&D expenditure that is entirely separate from the customer contract, meaning you bear the cost yourself and it is not reimbursed, you can claim RDEC on those costs. This applies to internal tooling, proprietary methods, or IP development that you undertake at your own risk alongside contracted work.
Genuinely independent technical risk. If you entered into a contract to deliver a result (a fixed specification), not to perform R&D, but in the course of delivering that result you encountered and resolved genuine technical uncertainties that go beyond the contracted scope, the question of whether those additional costs are qualifying requires careful analysis. HMRC's BEIS Guidelines focus on whether there was genuine technical uncertainty and whether the work seeks an advance in science or technology, not simply on who owns the contract.
The line between work done under a commercial contract and genuine independent R&D is contested territory and has been litigated at tribunal. If you believe you have a valid claim despite performing work for a customer, get specialist advice rather than assuming either that you can or cannot claim.
Practical Examples
| Scenario | Who claims RDEC | Notes |
|---|---|---|
| Software agency builds bespoke platform for client who directs the R&D | Client (contractor) | Client claims 65% of payment as qualifying subcontractor cost |
| Agency develops internal reusable framework at own cost alongside client work | Agency (own R&D) | Agency can claim on own costs not reimbursed by client |
| Manufacturer produces custom component to client specification | Client (contractor) | Manufacturer cannot claim; client claims on payments made |
| Consultancy given broad brief to explore a technical problem, no fixed specification | Potentially consultancy | Depends on contract terms and who bears technical and financial risk |
What to Document If You Are the Subcontractor
If your customer is claiming RDEC on payments to you, you should be aware of what your customer will need to support their claim. They will need to show in their Additional Information Form that the work you carried out was qualifying R&D, that you are an unconnected subcontractor (or connected with a different cap), and that the payments were made in connection with qualifying activities.
Some customers ask their subcontractors to confirm in writing that the work involved qualifying R&D activities, or to provide technical descriptions for inclusion in the AIF. You are not obliged to provide this, but cooperating with reasonable requests from a customer who is legitimately claiming is commercially sensible.
If you have your own independent R&D costs that you plan to claim, make sure those costs are clearly separated from the costs attributable to the customer contract. Blurred cost records are the main reason mixed claims are challenged. See the qualifying expenditure guide for how to segregate cost categories properly.
Frequently Asked Questions
The customer who commissioned the work (the "contractor" in HMRC terminology) claims the RDEC, not the company that physically performed it. The contractor can claim 65% of payments to unconnected subcontractors as qualifying expenditure. The subcontractor cannot claim RDEC on the same work.
Under the merged RDEC scheme, generally no. If you performed work under a contract where the customer directed and funded the R&D, the customer claims. You may still have a valid claim for your own independent R&D costs that are not covered by the customer's contract, provided you bear those costs yourself.
Under the merged scheme, duplicate claims on the same costs should not occur. If you suspect your customer is claiming RDEC on costs you have also claimed, seek specialist advice. Duplicate claims on the same expenditure are a compliance risk for both parties and HMRC's Connect system may identify the discrepancy.
Under the old SME regime, a small contractor could sometimes claim SME relief on its own costs even where those costs were funded by a customer contract, particularly if the customer was a large company and not an SME. The merged scheme eliminated this by making the contracting party the exclusive claimant in all cases from April 2024.
Yes, if you incur qualifying R&D expenditure that is not covered by the customer's contract, not reimbursed by the customer, and is genuinely at your own risk. Internal tooling, proprietary methods, or IP development you fund yourself can be claimed even alongside contracted work, provided the costs are clearly segregated.
Unsure Whether You or Your Customer Claims?
Uplift Tax works with HMRC-registered specialists who can assess your specific contract structure and advise on whether you have a valid claim. The assessment is free.
Request Your Free Assessment