Does it matter who pays for the R&D?

The short answer is yes, it does matter who pays for the R&D, particularly where a company is considering relief under the SME scheme. The position does not apply in the same way under the RDEC or merged scheme framework.

Under the SME scheme, companies cannot generally claim R and D tax relief on subsidised expenditure. This includes situations where the work is funded directly or indirectly by another party. In practice, this has often affected SMEs carrying out R&D work for larger companies under contract. In some cases, SMEs could claim under the RDEC scheme rather than the SME scheme.

For accounting periods beginning on or after 1 April 2024, the merged R&D scheme changes how subcontracted and subsidised R&D is treated. In many cases, where an SME carries out R&D for another company, the company commissioning the work may be entitled to claim R&D tax relief. The position depends on the contractual arrangements, the intended recipient of the R&D activity, and which party is responsible for undertaking and directing the work.

This means SMEs undertaking R&D on behalf of other businesses should review each project carefully. R&D eligibility depends on the nature of the activity being carried out. This includes who initiated the R&D work and who remains responsible for resolving the scientific or technological uncertainty. It is not determined solely by company size or the source of funding.

The main point is that the way a project is funded and who is responsible for the work can affect which R&D tax credit scheme applies and whether the costs qualify at all. This should be reviewed for each project individually, especially where multiple parties are involved.