Can I claim R&D tax credits on subcontracted work?
Answered 17 March 2026
Here is a comprehensive answer on claiming R&D tax credits on subcontracted work, broken down by scheme:
HMRC Guidance / Practice
What counts as "subcontracted" R&D?
There is no statutory definition of "subcontracted" — each case is determined on its particular facts. A contract to provide services (rather than to undertake a specific part of the R&D activities) is not subcontracted R&D, nor is a contract of personal employment. Where a contract exists for activities to be carried out by one party for another, and those activities form the whole or part of an R&D project, R&D has been subcontracted.
⚠️ Key anti-avoidance rule: Expenditure incurred by a company in carrying out activities contracted to it by another person is not qualifying expenditure — this prevents both parties claiming relief for the same activities.
SME Scheme
An SME can claim on payments to a subcontractor carrying out activities that are part of the company's relevant R&D. The rules differ depending on whether the subcontractor is connected or unconnected:
Unconnected subcontractor: The SME can claim on 65% of the payment made to the subcontractor. The subcontractor does not have to do the work itself and can further subcontract to a third party.
Connected subcontractor: The SME can claim on the lower of:
- the payment made to the subcontractor, or
- the subcontractor's relevant expenditure (i.e. non-capital, non-subsidised expenditure on staffing costs, externally provided workers, consumable items, software, data licences, cloud computing, etc.)
The subcontract payment must be brought into account in the subcontractor's GAAP accounts within 12 months of the end of the claimant's accounting period.
The company and subcontractor may also jointly elect to be treated as connected even if they are not, by written notice to HMRC within 2 years of the end of the principal's accounting period in which the contract is made.
RDEC Scheme (Large Companies)
A large company cannot generally claim expenditure on subcontracted R&D as qualifying expenditure. However, a large company can claim if it contracts R&D work to be directly undertaken by:
- a qualifying body,
- an individual, or
- a partnership where each member is an individual. There is no 65% restriction on subcontractor expenditure under RDEC.
Important: The "contracted-to" trap
If your company is the subcontractor (i.e. the R&D has been contracted to you), you generally cannot claim SME enhanced relief. However, if the work was contracted to you by a large company, you may be entitled to claim RDEC instead.
Worked Example
An automotive company (A) subcontracts R&D to a US company (B), which then subcontracts to its UK subsidiary (C). Company A can claim (it subcontracted the R&D). The US company B cannot claim (not within UK CT). The UK subsidiary C cannot claim because Company A is able to claim — the legislation prevents a double claim.
Citation sources
CTA09/Ss 1133 - 1136 The meaning of subcontracted activities is dealt with at CIRD84250. The subcontracted R&D must be directly undertaken on behalf of the company, meaning that the subcontractor must do the work itself, not further subcontract it to a third party, unless the parties are unconnected and the claim is made under the scheme. The subcontracted expenditure that is within this category of qualifying expenditure is different for the SME scheme and the RDEC. SME scheme For an SME co
ensure that no enhanced Relief is given indirectly to what is, in economic substance, the expenditure of large companies who contract out work to SMEs. Its function is not to ensure that if it denies relief to one party, another party gets the relief; (3) the legislation does not provide that there must always be a claim by someone for expenditure qualifying as R&D Expenditure. The right to claim enhanced R&D relief in respect of R&D expenditure is heavily circumscribed and it is evident that no
ting any arguments you should consider the appropriate tax treatment, so as to better focus attention on those areas where tax is at risk. ‘New’ CIRD84250 (inserted 30.11.21): CIRD84250 – R&D tax relief: categories of qualifying expenditure: subcontracted activities – meaning of subcontracted SME Scheme, Activities contracted to the SME – ss 1052(5) & 1053(4) CTA09 Expenditure incurred by a company in carrying out activities contracted to it by another person is not qualifying expenditure. This
UK Automotive company A subcontracts R&D to an unconnected US company B to develop a new gearbox. The development of the gearbox is R&D in its own right but would also form part of the Company A’s R&D. The US company B then subcontracts the work on to its UK subsidiary, a connected party, Company C. Company A can claim. It subcontracted R&D to another person, and the activity is occurring in the UK so CTA09/S1138A does not apply. The US company B can’t claim (because it is not carrying on a tra
A large company cannot generally claim expenditure on subcontracted R&D as qualifying expenditure CIRD84200. Subject to certain conditions, a large company can claim payments made as contributions to independent research as qualifying expenditure CIRD82200. For a large company there is no requirement that any intellectual property rights arising from the research are vested in the company claiming the R&D tax relief. Under the large company scheme any subsidies received are not deducted from the
d and is incurred in carrying on the subcontracted activities. The expenditure must be on: staffing costs (See CIRD83000) externally provided workers (for expenditure incurred on or after 27 September 2003) (See CIRD84000) consumable stores (this ceased to be a category of qualifying expenditure for expenditure incurred on or after 1 April 2004 (See CIRD82450) consumable items (CIRD82300 ) or software (CIRD82500), (these are categories of qualifying expenditure incurred on or after 1 April 20
CTA10/S357BLC and CTA10/BLD There is no definition of ‘subcontracted’ within the legislation for R&D as each case is determined on its particular facts, with reference to the relevant guidance on categories of subcontracted activities. However, guidance to the meaning of subcontracted activities is covered at CIRD84250 and CTA10/S1133 defines “sub-contractor payment”. It covers a variety of contractual arrangements. S1 is the company’s qualifying expenditure on relevant R&D sub-contracted to un