Most worked examples cost one company’s claim. This one costs two, on opposite sides of the same contracts: £70,500 net to the company that commissioned the work, £51,840 in cash to the company that carried it out, and the same £400,000 of contractor spend generating relief once. Example Defence Systems Ltd and Example Sensors Ltd are invented companies and every figure here is illustrative. A sector page tells you who tends to claim in a supply chain; this one tells you why.
Both have an accounting period running from 1 April 2025 to 31 March 2026, so both claim the merged R&D Expenditure Credit at CTA 2009 Part 13 Chapter 1A, the scheme for accounting periods beginning on or after 1 April 2024.
The two companies and the three contracts
Example Defence Systems Ltd is an illustrative prime contractor supplying detection equipment to defence customers. Profitable, no associated companies, and augmented profits well above £250,000, so corporation tax at the 25% main rate.
Example Sensors Ltd is an illustrative subcontractor, unconnected to its customer. Same accounting period, loss-making for the year and not R&D-intensive, so the merged scheme applies to it as well. It holds two contracts with Example Defence Systems and a third with a customer of its own.
- Contract A. Example Defence Systems commissions Example Sensors to resolve a defined technical problem in a detection subsystem. The contract carries a technical schedule describing the problem, the parameters to be met and the test regime. Payment £400,000.
- Contract B. Example Defence Systems orders a finished mounting assembly against a performance specification. It wants a part to a standard, not a research programme, and neither the contract nor the negotiations refer to technical unknowns. Meeting the specification turns out to require Example Sensors to resolve a technological uncertainty of its own.
- Contract C. Example Sensors carries out development work for a US customer that carries on no trade within the charge to UK tax.
The example sits in the defence supply chain deliberately: layered contracts are where this test does its hardest work.
Which company holds the right to claim on each contract?
The test is CTA 2009 s1133(2)(c). A person contracts out R&D where it is reasonable to assume, having regard to the terms of the contract and any surrounding circumstances, that the person intended or contemplated when entering into the contract that research and development of that sort would be undertaken in order to meet the obligations owed to it. Where that holds, the customer claims. Where it does not, the contractor claims on its own costs. The rules are set out in contracted-out R&D: who claims?
HMRC’s guidance at CIRD161000 asks for more than awareness. It looks for a specific appreciation of what R&D will be done and the ability to understand and specify it, and it says that detailed knowledge is not the same as intention where the customer is indifferent to how the deliverable is achieved. The surrounding circumstances HMRC weighs include who owns the intellectual property, where the financial risk sits, how much autonomy the contractor has over the work, how the results will be exploited, who made the decision to do the work and why, the parties’ relative experience, and whether the contractor holds itself out as a provider of R&D services. HMRC says these will not all be equally relevant in every case.
A separate route sits alongside it: CTA 2009 s1042F gives the contractor its own claim where the R&D is contracted out to it by an ineligible company or by a person not acting in the course of a trade, profession or vocation within the charge to tax. That decides contract C, without anyone having to ask what the US customer had in mind.
| Contract | Did the customer intend or contemplate R&D of that sort? | Who claims | On what |
|---|---|---|---|
| A | Yes: the technical schedule describes it | Example Defence Systems | 65% of the £400,000 it paid |
| B | No: it ordered a part to a specification | Example Sensors | Its own qualifying costs |
| C | The customer is outside the charge to UK tax (s1042F) | Example Sensors | Its own qualifying costs |
What separates contracts A and B is what the customer had in mind when it signed.
What is the customer’s claim worth?
Example Defence Systems claims on contract A: its own staff time, its consumable items, and the qualifying element of what it paid its subcontractor.
| Cost category | Amount | Qualifying element |
|---|---|---|
| Own staffing costs, apportioned to the R&D | £180,000 | £180,000 |
| Contractor payments to Example Sensors under contract A, unconnected | £400,000 | £260,000 |
| Consumable items | £30,000 | £30,000 |
| Total qualifying expenditure | £470,000 |
Payments to unconnected subcontractors qualify at 65%, under s1136: £400,000 x 65% = £260,000. The other £140,000 is money genuinely spent that buys nothing in the claim; qualifying costs sets out the categories.
| Step | Figure |
|---|---|
| Qualifying R&D expenditure | £470,000 |
| Expenditure credit at 20% | £94,000 |
| Corporation tax on the credit at the 25% main rate | £23,500 |
| Net benefit | £70,500, or 15p per £1 |
The 20% rate is the relevant percentage at s1042G, and the merged scheme’s credit is taxable income in the company’s own hands, which is why £23,500 of the £94,000 goes back out in corporation tax.
What is the contractor’s claim worth?
Example Sensors claims nothing on contract A. Its claim comes from contract B, where its customer contemplated no R&D, and contract C, where its customer is outside the charge to UK tax.
| Cost category | Contract | Amount |
|---|---|---|
| Staffing costs | B | £150,000 |
| Consumable items | B | £24,000 |
| Software, data licences and cloud computing | B | £6,000 |
| Staffing costs | C | £120,000 |
| Consumable items | C | £20,000 |
| Total qualifying expenditure | £320,000 |
| Step | Figure |
|---|---|
| Qualifying R&D expenditure | £320,000 |
| Expenditure credit at 20% | £64,000 |
| Step 2, notional tax at the 19% small profits rate | £12,160 |
| Step 3, the PAYE cap: £20,000 plus 300% of £290,000 of relevant PAYE and NIC | £890,000, no restriction |
| Step 7, paid in cash | £51,840, or 16.2p per £1 |
A loss-maker takes the credit through the seven payment steps at s1042I. Step 2 deducts notional tax at s1042K, and because this company has no profits chargeable at the main rate the deduction comes off at the 19% small profits rate rather than 25%. That is why the contractor keeps more per £1 than its profitable customer does. Step 3 applies the cap at s1112B, £20,000 plus 300% of relevant PAYE and National Insurance contributions, which on this payroll gives £890,000 against a £64,000 credit. A thin UK payroll and heavy use of its own suppliers would give a different answer.
Then the exclusion that matters. Example Sensors incurred £240,000 of staffing costs and £35,000 of consumable items doing the contract A work, £275,000 in all, and none of it enters its claim, because Example Defence Systems holds the right to claim that R&D. Had it been claimable on the contractor’s side it would have been worth £44,550. The same R&D cannot be claimed twice, and relief taken on the wrong side of a contract is an incorrect claim.
What the two claims add up to
The £400,000 under contract A generates relief once: £260,000 of qualifying expenditure in the customer’s claim, nothing in the contractor’s. For a reader who wants the sum, relief across the two companies totals £122,340, being £70,500 plus £51,840. That is the arithmetic of two correctly-sided claims rather than an outcome to aim at. Put the work on the wrong side and the total does not rise; it sits with the wrong company until someone checks.
What the claim looks like on the form
Each company files on its own return. Both file an Additional Information Form before or with the CT600, setting out the accounting period, the qualifying expenditure by category and the project descriptions. Example Defence Systems describes the work it commissioned under contract A; Example Sensors describes contracts B and C and stays silent on contract A. The credit then runs through the CT600 and CT600L, worked through in how to enter an R&D claim on the CT600 and CT600L.
Nothing in either filing evidences the split. That evidence lives in the contract file, where an enquiry will look for it.
What should the contracts say?
If the customer expects to claim, the contract should show that the R&D was in its contemplation when it signed: describe the technical work, reference the development plan or specification, and keep the tender and negotiation papers. If the contractor expects to claim in its 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. Wording does not override the facts, and HMRC can test what sits behind any recital, but a contract that matches them settles most disputes before they start.
What changes the answer
- Connected parties. The 65% rule is for unconnected subcontractors. Connected-party subcontracting follows different rules, so the £260,000 cannot be assumed where the parties are connected. Groups and connected companies sets out what applies.
- The work is done abroad. Contractor payments qualify only where the R&D is undertaken in the UK, subject to the qualifying overseas expenditure exception. Had contract A been delivered from outside the UK without meeting that exception, £260,000 would leave the customer’s claim, taking £52,000 off the gross credit and £39,000 off its net benefit. Overseas R&D covers the narrow exception.
- An ineligible customer. The s1042F route also opens where the customer is a body that cannot claim R&D relief itself, such as a charity, an institution of higher education, a scientific research organisation or a health service body (CIRD163000). Publicly funded consortium work raises this most often.
- The old rules. For accounting periods beginning before 1 April 2024 there was no single definitive test, as the First-tier Tribunal confirmed in Collins Construction and Stage One Creative Services, neither of which was appealed. HMRC updated its guidance in February 2025 to weigh factors case by case. That is enquiry-defence knowledge for old periods rather than planning law now, and it still matters for backdated claims.
Talk it through with a chartered adviser
Deciding which side of contracts A and B held the right to claim is the work, and it is a reading job: the contract, the technical schedule, the tender papers and what the parties actually did. Two finance teams both assuming the claim is theirs is how a supply chain ends up with one incorrect claim and one missed one.
For an estimate on your own figures, use the claim value calculator. The rest of the series sits in the worked examples index, and the schemes in the R&D tax relief guide.
Reading contracts to that standard, and signing off the claim that follows, is what a chartered adviser here does before anything reaches HMRC. If you have a contract in front of you and you are not certain which side owns the claim, get in touch and we will read it and tell you.
Sources
- CTA 2009 s1133 — subsection (2)(c), the contracted-out test: it must be reasonable to assume, having regard to the terms of the contract and any surrounding circumstances, that the person intended or contemplated when entering into the contract that research and development of that sort would be undertaken.
- CTA 2009 s1042F — the contractor’s own claim where the R&D is contracted out to it by an ineligible company or by a person not acting in the course of a trade, profession or vocation within the charge to tax.
- CTA 2009 s1136 — the qualifying element of a contractor payment: 65% of the relevant portion.
- CTA 2009 s1042G — the 20% relevant percentage.
- CTA 2009 s1042I — the seven payment steps.
- CTA 2009 s1042K — the notional tax deduction at step 2.
- CTA 2009 s1112B — the cap of £20,000 plus three times relevant PAYE and NIC liabilities.
- CIRD161000: contracted-out R&D — the intended-or-contemplated test, the surrounding circumstances HMRC weighs, and customers outside the charge to UK corporation tax.
- CIRD162000 — HMRC’s own worked examples of the test.
- CIRD163000: ineligible companies — the bodies that cannot claim R&D relief, so a contractor working for one of them claims in its own right.
- CIRD84250: subcontracted R&D, post-tribunal — the case-by-case factors under the old scheme after the First-tier Tribunal decisions.
- Check what R&D costs you can claim — 65% of payments to unconnected contractors and of staff provision payments to unconnected providers.
Every CIRD paragraph cited above is indexed on our CIRD reference index, with HMRC’s own title for each, a line on what it says and the date HMRC last revised it.