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Does it matter who pays for the R&D?

Yes, it does matter in the SME scheme. Companies cannot claim under the SME scheme if they are acting as subcontractors and conducting R&D for someone else. To be considered a subcontractor, the company must receive payment for carrying out R&D, regardless of the outcome. However, a distinction exists if a company develops a product and is paid only upon successful production of the finished product.

If an SME is subcontracted by another SME for R&D work, the paying company can claim the R&D tax credit. On the other hand, if an SME acts as a subcontractor for a large company, the SME doing the work can still claim, but under the RDEC (for large companies) instead of as an SME.

Subsidised R&D cannot be claimed under the SME scheme. In the RDEC scheme, the subsidy source (who pays) doesn’t matter; only the R&D work done by the claiming company can be included in the claim. However, under the RDEC scheme, R&D subcontracted to other companies cannot be claimed, and only work subcontracted to individuals, groups of individuals, or allowed bodies like universities are eligible for inclusion.

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