First, some terminology🔗

Before we dive into the legislation, we need to clarify some of the terms used by HMRC. This will make it much easier to understand the changes.

• Customer: the business that commissioned the R&D
• Contractor: the company commissioned to do the R&D
• Subcontractor: A company commissioned to do the customer’s R&D on behalf of the contractor

So, while most people use ‘subcontractor’ to mean both contractors and subcontractors, HMRC distinguishes between the two based on where they are in the R&D supply chain.

What are the new rules?🔗

The new rules say that the right to claim R&D lies with the company that decided R&D was necessary.

Right away, you’re probably thinking, ‘that’s a bit vague’. And you’d be right. HMRC offers a little more guidance on what this means, but it’s still a pretty big grey area.

To be more specific, a customer can claim R&D Tax Relief on work that meets the new definition of “contracted R&D”. I explain what this means in the next section.

Also, in most cases, costs for contractors and externally provided workers based overseas no longer qualify for relief. I’ll go into this change in more detail a little later.

The new definition of contracted R&D🔗

To qualify as “contracted R&D”, the work performed by the contractor must pass three tests:

Test 1: Was there a contract between the customer and the contractor?🔗

The R&D undertaken must be covered by the scope of the contract.

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Test 2: Did the contractor undertake qualifying R&D?🔗

You can find the definition of qualifying R&D for tax purposes here.

Test 3: Did the customer “intend” or “contemplate” that R&D was needed?🔗

The third test hinges on the customer ‘intending or contemplating’ the need for R&D. Clearly, this language is pretty vague and even slightly philosophical; what is ‘contemplation’?

To clarify, this test asks whether, theoretically, it would have been possible for a relevant technical expert (a competent professional) to predict that the contractor would have encountered a technical uncertainty against the existing industry baseline, and thus need to undertake qualifying development work, before the work started.

Thankfully, companies don’t necessarily need to provide concrete evidence that ‘intention or contemplation’ took place. That would be very hard to produce! However, sharing any evidence you have would certainly help, and is considered best practice.

What happens when the customer is ineligible for R&D Tax Relief?🔗

A customer can only claim R&D Tax Relief if they are eligible for the scheme themselves. If they’re not, the contractor may be able to claim relief on the work instead.

For a contractor to claim relief, two conditions need to be met.

Condition 1: The customer is ineligible for R&D Tax Relief🔗

For example, because they’re based overseas and aren’t liable for corporation tax.

Condition 2: The contractor’s work and costs are eligible for relief🔗

Fairly obviously, the contractor needs to have conducted work that qualifies for R&D Tax Relief.

Relief removed for overseas contractors and EPW costs🔗

Sadly, the costs for overseas contractors and EPWs will, in most cases, no longer qualify for relief. This is a big blow to the many UK startups and scaleups which use contractors to access talent from overseas.

Here’s how the government structured these rules:
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• Subcontractors – If the R&D took place outside the UK, you won’t be able to claim relief on the overseas subcontractors that delivered the work
• EPWs – You can only claim relief on externally provided workers if they are liable for PAYE and NIC

Helpfully, you can still claim relief on these costs if the conditions you need to perform the R&D aren’t present in the UK, and it would be “wholly unreasonable” for you to recreate them here.

You can learn more about the new rules around overseas contractors and EPWs here.

Transition arrangements and subcontracting chains🔗

When it comes to contractor relationships, there are lots of permutations, which means a large number of edge cases. Thankfully, HMRC’s guidance does a pretty good job of explaining who can claim and what happens in a number of complex situations.

A series of transition agreements explain what happens when customers and contractors are affected by different sets of contracting rules. The guidance also covers ‘subcontracted chains’, where project work is parceled out across a network of foreign and domestic businesses.

The rules around these cases are too many and varied to explain here - but it is important to familiarise yourself with them if you are planning to claim for contracted R&D and don’t have help from an expert.

GrantTree’s advice on the new rules🔗

The new rules will fundamentally change how companies claim relief on contracted R&D.

To give yourself the best possible chance of claiming relief without risking trouble from HMRC, we have been advising clients to do the following:

• Get to grips with these new rules as soon as possible
• In contracts with your customer or contractor, clearly delineate the R&D projects from other work you want them to perform
• Keep excellent records, especially regarding discussions around the need to perform qualifying R&D

If you have any questions about the new legislation and how it applies to your individual situation, don’t hesitate to reach out. My colleagues and I at GrantTree would be happy to help.

About the Author🔗

Emily Siddaway-Parmenter, MEng, EngTech MICE, is a Senior R&D Technical Consultant at GrantTree, specialising in sustainability and the built environment.

She joined GrantTree in 2024 from Deloitte, where she spent four years as a Senior R&D Technical Consultant, preparing compliant claims for clients large and small.

Before Deloitte, Emily spent eight years at leading construction firm Galliford Try, two as a research and development engineer and six as a site engineer.

Her research and development role included conducting cutting-edge research alongside universities and preparing R&D Tax claims for the company’s development work.

Emily has a Master’s Degree in civil engineering with sustainability from Brunel University and has EngTech chartership status through the Institution of Civil Engineers.

In her spare time, Emily mentors female engineers through the Women in Brunel Engineering and Computing scheme.