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When a company takes on a new research and development (R&D) project, outside skills and resource is likely to be needed. This could be in the form of temporary staff, including externally provided workers (EPWs) and subcontractors.
So how will taking on such workers affect any subsequent claim for R&D Tax Credits? Here we take a look.
Work which is subcontracted out is treated differently depending on whether the company is claiming using the SME scheme or RDEC. Essentially, those using RDEC are generally not able to recoup any subcontractor costs in the way that those using the SME scheme can. Costs relating to Externally Provided Workers however are not treated in the same way.
Looking a little closer, EPWs are sourced from an agency outside of the company. Unlike your regular employees, their contract is with their agency - not with you. So, the cost that is claimable is the payment your company made to the agency. If you were paying the staff member directly, then they would be classed as a Subcontractor and the Subcontractor rules would apply.
No matter your company’s size or turnover, R&D tax relief is generally given on 65% of the payments made to the external agency. The remaining 35% is fixed by HMRC and is designed to reflect the external provider’s profit margin. Don’t forget however, if your company and the external agency are connected, you may in fact be able to claim 100% back. This is something our expert team at Myriad Associates can guide you on.
Although not necessarily written into a contract, the below elements together can strongly suggest that subcontractor R&D has occurred.
The work carried out by a Subcontractor is largely autonomous. That is to say, the Subcontractor and their team will carry out the work independently, deciding how best to complete it, and with little to no supervision.
For subcontracted R&D, the Subcontractor is expected to provide specific deliverables.
Another strong indicator is where payment has been made for someone to use their specific skills and knowledge to achieve something. This would be instead of using them for the generic purchase of materials for example, and on a project by project basis.
Subcontracting work has also typically been carried out when the burden of financial risk is solely on the company, not the subcontractor. What we mean is, a project is likely to be considered as subcontracted R&D if it has been agreed that the Subcontractor will be paid even if the project fails or is shelved.
As previously mentioned, usually only SMEs can claim for Subcontracted R&D costs. However, larger companies claiming under RDEC may be able to claim if the work was undertaken by a higher education institute, charity, health service body or scientific research organisation.
When making a claim for R&D Tax Credits, it’s also crucial to identify whether the Subcontractor has themselves claimed R&D Tax Credits for the project already. This is because HMRC will not allow the same project to be claimed for twice.
At this point you may find it useful to familiarise yourself with the RDEC scheme fully by reading our recent blog post: Everything You Ever Needed To Know About RDEC.
We know that RDEC claimants cannot include Subcontractor costs in their claim at all. However, if you’re an SME company and R&D work has been subcontracted out to you, claims can be made under the RDEC scheme for work you’ve done yourself. Bear in mind though that RDEC is far less generous than the SME scheme, so your award will be lower than it would’ve been otherwise.
At Myriad Associates we have spent nearly two decades working with companies of all shapes and sizes on successfully securing R&D Tax Credits. We know where the common mistakes lie, and unfortunately this is one we see a lot. It’s also something that can get claimants into some serious bother with HMRC.
The issue is where directors are registered as their own companies. So instead of paying a salary or dividends to the director, companies pay a fee to the director’s company. This means that the director effectively becomes a subcontractor.
HMRC really doesn’t like this, and it’s a practice we strongly recommend avoiding. It could lead to an enquiry which will (at best) hold your claim up. Instead, our advice is that if you plan to include directors’ costs in your R&D Tax Credits claim, they should be receiving a salary.
There’s no doubt that untangling the rules around EPWs, subcontractors and R&D Tax Credits isn’t straightforward. Correctly apportioning and calculating each type of R&D expenditure is complex, and errors are common.
When submitting your R&D Tax Credits claim, mistakes are the one thing you definitely need to avoid. HMRC are hot on spotting them - however innocent they are - and any inconsistencies will lead to further questions arising. If HMRC is still not happy, either with your calculations or your technical narrative, then it could launch an enquiry (stressful and potentially expensive). There’s even the chance of being heavily fined - so don’t take that risk.
Call the R&D tax specialists at Myriad Associates today who will be pleased to guide you through your claim. We’ll support you every step of the way before you hit submit, and our 100% success rate speaks volumes.
Don’t go it alone. Get in touch today and make sure you receive the R&D tax relief your company deserves - first time, and hassle-free.