One of the more significant changes to the R&D tax regime for accounting periods beginning on or after 1 April 2024 concerns contracted-out R&D.

At first glance, the question of who should claim might appear straightforward: Who actually carried out the R&D? However, under the new rules, that is no longer the right question.

HMRC’s guidance states that the general principle is to identify the party that decided to initiate the R&D. Where a customer engages a contractor, the fact that the contractor’s engineers, developers or scientists physically perform the work does not necessarily mean that the contractor owns the R&D claim.

The key question is whether, when entering into the contract, the customer intended or contemplated that R&D of that sort would be undertaken. This goes beyond simply knowing that some technical development may be required. HMRC says that “intended or contemplated” requires a more specific appreciation of the R&D being undertaken. Simply recognising that a project will involve technical challenges, and engaging specialists to resolve them, is not enough.

Contemplating R&D requires a specific appreciation of what R&D will be done and therefore the ability to understand and specify that. It can thus be interpreted as:

  • Identifying technological challenges and uncertainties (although not necessarily knowing how these may be resolved).
  • Assessing alternative technical approaches.
  • Concluding that existing knowledge may be insufficient.
  • Deciding to commission work because R&D is expected to be necessary.

Sometimes, the boundaries around who is contemplating the R&D can shift, changing who is entitled to claim. A project may start as the customer’s R&D but later evolve into the contractor’s R&D. For example, a manufacturer may develop a new product and commission a specialist engineering company to solve an identified technological uncertainty. Although the engineers may undertake all of the experimental work, the manufacturer has identified and contemplated the R&D, so the claim will sit with the manufacturer. However, if the engineering company later encounters a technological problem that the manufacturer neither identified nor planned for and independently decides to undertake R&D to resolve it, the engineering company may be the party entitled to claim.

However, sometimes it may not be as straightforward as that – In determining who is entitled to claim, HMRC’s guidance suggests that other surrounding circumstances must also be considered, rather than relying solely on contractual documents, such as:

  • who bears the financial risk;
  • the degree of autonomy in how the work is undertaken;
  • ownership of intellectual property;
  • who will exploit the results of the R&D;
  • how the decision to undertake the R&D arose;
  • the experience and seniority of those making that decision; and
  • the nature of the parties, including whether the contractor carries on a trade involving R&D services, whether the contract is consistent with those ordinary R&D activities, and who contemplated the need for R&D.

What does this mean in practice?

Businesses undertaking R&D through customers, consultants, software developers, engineering firms or other contractors should not simply ask:

“Who did the work?”

They should ask:

“Whose R&D was it?” or “Whose R&D is this activity actually advancing?”

In practice, entitlement now depends on a careful analysis of the technical project, the contractual context and, most importantly, who contemplated and decided that R&D needed to be undertaken.

Conclusion

Contracted-out R&D can no longer be assessed by only asking who carried out the work. The written contract remains important, but it must be considered alongside the technical facts, the surrounding circumstances and the decision-making process that led to the R&D being undertaken.