HMRC Releases Major Update on R&D Tax Relief Subcontracting Rules
What does this mean for businesses going forward?
In a significant development for the R&D tax relief landscape, HMRC has today released a major update to its guidance on subcontracting (CIRD84250). This change follows several recent First-Tier Tribunal (FTT) losses for HMRC on the issue and marks a shift in its approach, essentially reverting to the official position held before late 2021.
This update softens HMRC’s previous hardline stance, which stated that SMEs could not claim R&D tax credits if they were acting as subcontractors. Instead, the new guidance introduces a more nuanced, case-by-case approach, considering several factors in determining who has the right to claim.
What Factors Now Determine Who Can Claim?
Under the updated guidance, HMRC will assess the relationship between the customer and the subcontractor based on the following factors:
Contract Wording
Does the contract specifically define the subcontractor’s role in conducting R&D?
Customer Awareness
Was the customer aware that R&D was required for the project?
Subcontractor Autonomy
How much control did the subcontractor have over the R&D work?
Financial Risk
Who bore the financial risk of the project?
Intellectual Property (IP) Ownership
Who retains rights to any IP developed through the R&D process?
These factors suggest that HMRC will no longer take a blanket approach but will instead evaluate claims on a case-by-case basis.
Is There Still Bias in HMRC’s Interpretation?
Despite the update, HMRC’s position still appears to favour the customer rather than the subcontractor in many cases.
For instance, the guidance states that if the customer was simply “aware” of the need for R&D, this would be enough to establish that the customer—not the subcontractor—has the right to claim tax relief.
This is a much lower threshold than the standard set by the Merged R&D Scheme, where the customer must have “intended or contemplated” the R&D work—implying a far greater level of involvement and understanding.
What Happens to Previous Rejected Claims?
A major unanswered question is how this new guidance will affect companies whose claims were previously rejected under HMRC’s now-superseded stance. Some businesses can no longer amend their claims because filing deadlines have passed, while others chose not to submit a claim at all due to uncertainty about the changing interpretation.
The industry will patiently wait to see if special arrangements will be made to allow these claims to be processed fairly.
This change marks an important step in clarifying the position on subcontractor claims, but significant questions remain. Businesses affected by previous rulings should seek expert advice to assess whether they have any recourse under the revised guidance.
If you’re unsure how these changes impact your R&D tax credit claim, contact our team today for guidance.
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