Contractors serving overseas or untaxed customers can claim in their own right. Contract wording decides real money here.
When one company pays another to carry out R&D, only one of them can claim tax relief on that work, and under the merged scheme the contract decides which. The customer claims where it intended or contemplated the specific R&D when the contract was made. Where it did not, the contractor claims in its own right. A contractor whose customer is overseas, or otherwise outside the charge to UK corporation tax, can also claim in its own right.
These rules apply to accounting periods beginning on or after 1 April 2024. They replaced an old-scheme position so unsettled that it ended up at tribunal, which still matters for earlier periods and is covered at the end of this page.
Why does it matter who claims?
The same R&D cannot be claimed twice. If the customer holds the right to claim, the contractor does not, and the reverse. A company that claims relief belonging to the other side of its contract has made an incorrect claim, with the repayment and penalty exposure that follows if HMRC opens an enquiry.
The value at stake differs too. A customer claiming contracted-out R&D includes 65% of what it pays an unconnected contractor. A contractor claiming in its own right includes its own qualifying costs (staff, consumables, software and the rest) under the normal category rules. The same project can produce quite different claim values depending on where the right to claim sits.
What does “intended or contemplated” mean?
The test looks at what the customer had in mind at the moment the contract was made, and it concerns the specific R&D that was carried out, not innovation in some general sense. A customer that commissioned a defined programme of experimental development plainly intended it. A customer that ordered a finished product, priced and specified as a product, with no reference to technical unknowns, generally contemplated no R&D at all.
Evidence decides these questions: the contract itself, technical schedules, tender documents, specifications and the correspondence around them. There is not yet a body of tribunal decisions interpreting the new wording, so the strongest position is the documented one. Parties who record at the outset what R&D is expected, and who is to claim it, rarely have to argue about it later.
Who claims in practice? Three scenarios
The customer commissions the R&D. A medtech company engages a specialist engineering firm to resolve a defined technical problem in its device, with the work described in the contract. The customer intended the specific R&D when the contract was made, so the customer claims, including 65% of its payments to the firm. The engineering firm cannot claim relief on that commission.
The contractor discovers the R&D. A manufacturer agrees to supply a component against a customer’s performance specification. The customer wanted a part, not a research programme, and nothing in the contract or the negotiations contemplated R&D. Meeting the specification turns out to require the manufacturer to resolve genuine technological uncertainty. The customer neither intended nor contemplated that R&D, so the manufacturer claims in its own right, on its own costs.
The customer is outside UK tax. A UK contract research organisation runs a development programme for a US sponsor. The sponsor is outside the charge to UK corporation tax, so the UK contractor can claim in its own right on the work. This preserves relief for UK companies doing R&D for overseas customers, and it matters enormously for CROs, which we cover in who owns the claim under a CRO contract.
| Scenario | Who claims | On what |
|---|---|---|
| Customer intended or contemplated the specific R&D at contract | The customer | 65% of payments to an unconnected contractor |
| Customer did not intend or contemplate the R&D | The contractor | Its own qualifying costs under the normal rules |
| Customer overseas or outside UK corporation tax | The contractor | Its own qualifying costs under the normal rules |
How much of a subcontractor payment qualifies?
Payments to unconnected subcontractors enter the customer’s claim at 65%. Pay an unconnected contractor £100,000 for qualifying R&D and £65,000 enters the claim, which generates a £13,000 gross credit at the merged scheme’s 20% rate. The credit is taxable, so across a claim the net benefit works out at 15p per £1 of qualifying spend at the 25% corporation tax rate and 16.2p where the 19% rate applies or the company is loss-making.
Two caveats. Connected-party subcontracting follows different rules, so do not assume the 65% figure where the parties are connected. And for current-scheme periods the work itself must be undertaken in the UK, subject to a narrow exception explained in overseas R&D costs under the merged scheme.
What should your contracts say?
If you are the customer and you expect to claim, the contract should show that the R&D was in your contemplation when you signed: describe the technical work, reference your development plan or specification, and keep the tender and negotiation papers. If you are the contractor and you expect to claim in your own right, the same documents should support the opposite picture, a commission for an outcome rather than for research.
The cleanest arrangements state expressly which party intends to claim R&D relief. Wording does not override reality, and HMRC can test the facts behind any recital, but a contract that matches the facts settles most disputes before they start. What you cannot safely do is leave the question open and let both finance teams assume the claim is theirs.
How were the old rules different?
For accounting periods beginning before 1 April 2024, the old SME scheme had no single definitive test for contracted-out R&D. That was confirmed by the First-tier Tribunal in Collins Construction and Stage One Creative Services, decisions HMRC chose not to appeal, and HMRC updated its guidance in February and March 2025 to reflect them. The updated guidance weighs factors case by case: the contract wording, whether the customer was aware R&D was needed, the contractor’s autonomy over the work, who bore the financial risk, and who kept the intellectual property. The tribunals also confirmed that payments under an ordinary commercial contract are not subsidies, which had been a separate ground HMRC used to restrict old SME claims.
This is now enquiry-defence knowledge rather than planning law, but it is live in two situations: HMRC checks into old-scheme claims, and backdated claims for periods still within the amendment window, which finally closes around 30 and 31 March 2027.
Where does this leave your claim?
Work out which side of the contract you sit on before you count a single cost, because everything else in the claim flows from it. If you are unsure which rules even apply to your accounting period, start with which R&D scheme applies to your company, and our R&D tax relief guides cover the rest of the framework.
If you have a contract in front of you and you are not certain who owns the claim, talk it through with a chartered adviser. We will read the contract, give you a straight answer, and put the evidence in place before anything is filed.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
Sources
- CIRD161000: contracted-out R&D — the intended-or-contemplated test and clients outside UK corporation tax.
- CIRD84250: subcontracted R&D, post-tribunal — the case-by-case factors under the old scheme after the First-tier Tribunal decisions.
- CIRD81650: subsidised expenditure, post-tribunal — commercial contract payments are not subsidies.
- Check what R&D costs you can claim — the 65% rule for unconnected contractor payments.