Does it matter who pays for the R&D?

The short answer is yes. Who pays for the R&D, and who is responsible for it, can determine which company is entitled to claim R and D tax relief.

For accounting periods beginning on or after 1 April 2024, most companies claim under the merged R&D scheme. Loss-making R&D-intensive SMEs that meet the qualifying conditions may instead be eligible for Enhanced R&D Intensive Support (ERIS).

Under the merged scheme, entitlement is no longer determined simply by which company incurred the cost. The legislation places greater emphasis on who commissioned the R&D and which company intended to achieve the scientific or technological advance.

Where one company engages another to carry out R&D, the company that commissions the work will often be entitled to claim. This is particularly the case where it sets the objectives of the project, bears the economic risk and is seeking the advance in science or technology. The subcontractor may not be able to claim for the same work.

It is important to understand that every subcontracted R&D project follows the same pattern which is the agreed contract, the nature of the work and the responsibilities of each party. All of these aspects need to be factored in when documenting the project’s qualifying expenditure. One of the key questions is which company is responsible for resolving the scientific or technological uncertainty. This should be assessed alongside the wider facts of the project rather than looking at funding in isolation.

The way a project is funded remains relevant during the R&D tax credits scheme claim process, but it is no longer the deciding factor. Each project should be reviewed individually to establish which company, if any, is entitled to claim R&D tax relief under the current rules.