Claiming subcontractor costs can be one of the more complicated areas of preparing and R&D tax claim. Here’s our quick guide on subcontractor costs and how they affect R&D tax relief claims.

What is meant by subcontractor costs?

In this context, subcontractor costs mean any payments made by the claimant company to another entity that has been subcontracted to carry out activities that form part of the claimant company’s R&D project – quite the mouthful! What this means in reality is that any payments made by the claimant company to third parties could be included in an R&D claim, as long as the subcontracted activities relate to the R&D projects.

Can all payments made to subcontractors be included in the R&D claim?

Yes! Under the merged scheme, all claimants can include payments made to subcontractors.

Anything else I need to know?

Next, you need to establish whether the claimant company and the subcontractor are connected. To do this, you need to look at the ownership of both entities, and look for any people in common, or connections between individuals. For example, if the director of the claimant company subcontracted work from their spouse’s company, you‘d have to treat this as a connected subcontractor scenario.

I know which subcontractors I can claim for, and which of these are connected to my client.

The next thing to work out is how much of the cost was related to the R&D projects, and how much of it you can include in the claim.

The first key point to remember here is that for unconnected subcontractors the maximum amount that can be claimed is 65% of the relevant payment made to the subcontractor. For example, a claimant company spends £50,000 on subcontracted testing in the claim year, of which 50% related to the R&D projects. The total they can include in their claim is:

£50,000 x 50% (amount that relates to R&D) x 65% (cap on subcontractor costs) = £16,250

The second key point to remember is that the rules are completely different for connected subcontractors. In this scenario, you can include the lower of either the payment to the connected subcontractor, or the relevant costs of the subcontractor. For example, a claimant company spends £50,000 on subcontracted testing by a connected company in the claim year, of which 100% relates to the R&D projects. The relevant costs of the connected subcontractor are £45,000. The total they can include in their claim is therefore £45,000.

Is there any way to avoid the 65% cap on subcontractor costs?

No. That’s the rule for unconnected subcontractors, and there are no exceptions to it.

What about raw materials and agency staff? Are these subcontracted costs?

No, these costs don’t count as subcontracted costs, but they can be included under other eligible cost categories. Raw materials should be claimed as consumables, and agency worker costs have a category all to themselves.