R&D Tax Relief: Connected Vs unconnected subcontractors

October 26th, 2020

Written by David Herd, senior tax advisory consultant at Champion Accountants

In a previous article, we discussed the difference between hiring an employee or a sub-contractor. You can find that article from July 24th here. Today, I’d like to look at connected versus unconnected sub-contractors, from an R&D Tax Relief perspective.

Research and development (R&D) Tax Relief is a lesser-known benefit that companies can take advantage of, and many businesses we speak to don’t fully understand how sub-contractors in general fit into this picture.

Most companies we deal with that have a basic understanding believe, initially, that the cost of their qualifying R&D sub-contractors must be reduced to 65% of the sub-contractor’s invoice value.

However, where we can show the sub-contractor is ‘connected’ to the claimant company, you can actually claim 100% of their invoice value as a qualifying cost. The important factor here is that the sub-contractor in question needs to be ‘connected’ to the company making a claim.

The definition of “connected” is challenging and is not something we can go into in detail in a short article. However, we know that companies out there are not gaining the maximum benefit for their R&D work performed solely because of the lack of understanding surrounding these sub-contractor rules.

This is often the case in Groups of companies or where there are common or related directors across multiple businesses, and we regularly prepare claims that face such issues.

I’m always more than happy to discuss the finer details regarding the ins and outs of R&D Tax Relief. If you’re interested in knowing more, either email me at david.herd@championgroup.co.uk, or you can reach me on 0161 703 2500.

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