Can I include independent contractors or subcontractors in my R&D tax credit claim?
Understanding what qualifies for an R&D tax credit claim is usually the biggest question businesses have for us. When we start to consider the different areas of expenditure that qualify for the scheme, it’s easiest to break them down into the following:
These are the parts that made your R&D projects possible, and there are different rules that apply to the costs you include in each area.
In this article we’ll take a closer look at ‘people’ costs; specifically, the rules around claiming for independent contractors (or ‘externally provided workers’ – EPWs) and subcontractors.
What’s the difference between an independent contractor (EPW) and a subcontractor?
To many people, there doesn’t appear to be much difference between independent contractors and subcontractors – but HMRC define the two very differently.
To HMRC, an independent contractor is sourced through an agency or staffing company. This means that you would be paying an agency rather than the individual carrying out the R&D for you, and there would be a contract in place to this effect. Ordinarily their fees would be charged by the hour or day, and if any remedial work was required, you would be responsible for the fees incurred here rather than the contractor. They would also be working under your supervision, like an employee, but can not be a director or actual employee of your company.
A subcontractor, on the other hand, is someone you would pay directly, for a fixed-price project. This means that any remedial work would be included in the overall project cost (so additional time or resource required for this would be covered by the subcontractor). They must invoice you through a company, though self-employed people can also be employed as subcontractors but must be able to show that they are working on a fixed price project.
With regards to subcontractors, another important point to note is HMRC only allow one claim per project per financial year. You will need to check with your subcontractor and agree on who will make the claim for the work that they have carried out on your behalf to avoid duplicate claims.
How much can I claim for these under the SME scheme?
The calculation here needs to look at the total cost of the independent contractor, against the proportion of their time spent on R&D. So, if an independent contractor charged £10,000 for their time, but only worked on R&D for 50% of that, you would need to take £5,000 of their fees, and then apply the 65% cap to come to the final figure to include in your claim.
HMRC applies different apportionment to different types of subcontractors; connected and unconnected.
To be classified as ‘connected’, a subcontractor would need to have the same shareholders as your company. Calculating qualifying expenditure for a connected subcontractor is more complicated, with HMRC allowing an amount to be claimed before on whichever is lower:
- The payment you have made to the connected subcontractor (your costs)
- The qualifying expenditure of the subcontractor (their costs)
To calculate qualifying expenditure for an unconnected subcontractor, you can claim 65% of qualifying costs attributed to this work.
For example, if an unconnected subcontractor charged you £100,000 to complete an R&D project, you would be able to include £65,000 (£100,000 x 65%) of these costs in your claim – providing the subcontractor had not already made a claim for this work themselves.
On the other hand, if the same contractor was connected to your company, and the work cost them £90,000 (though they charged you £100,000), you could only include 65% of the £90,000 in your claim, in accordance with HMRC legislation.
It is important to note that if there are elements of a project you have hired a subcontractor to complete which do not qualify as R&D, they would need to be deducted from the figures before any calculation was made.
So, if you paid £100,000 for a project though 20% of that was spent on non-R&D activity, you would need to apply the 65% cap to the £80,000 spent on R&D.
How much can I claim for these under the RDEC scheme?
HMRC states that generally, for a large company the expenditure on R&D contracted to other persons is not allowable. However, the costs charged by a subcontractor become permitted if the subcontractor is:
- An individual
- A partnership of individuals
- A charity
- A higher education institute
- A scientific research organisation
- A health service body
What kind of activity qualifies for the R&D Tax Credit scheme?
If the work you’re undertaking is in the effort to create a new product, process or service, or improving an existing one, it’s likely that you qualify for R&D tax credits. This work needs to involve risk and uncertainty which is often demonstrated through testing – and projects which fail still count for R&D tax credits.
I am a subcontractor – can I claim R&D tax credits?
You can make a claim like any other company that qualifies for R&D tax credits, though if you are carrying out work for a large company (by HMRC’s definition for the scheme, one that employs more than 500 people or has a turnover above €100 million), then you must claim under the RDEC scheme.
Also, the work you are claiming R&D tax credits for cannot have been included in a claim submitted by your client, as this would count as a duplicated claim and is not allowed by HMRC.
We have worked with many companies across various sectors helping them unlock the benefits of the R&D Tax Credit scheme. If you would like more information on how to make an application or to find out if you are eligible, speak to one of our expert advisors today.