Why subcontractor costs are under more scrutiny in R&D claims
If HMRC reviewed your subcontractor costs today, would the technical risk and control clearly sit with your business?
Subcontractor costs used to be a routine part of many R&D claims.
They are now one of the most scrutinised areas.
HMRC’s focus on subcontractor costs has intensified, particularly following reforms to the R&D regime and increased compliance activity.
Why?
Because subcontracting raises fundamental questions about who was actually undertaking the R&D.
Key issues HMRC is looking at
1. Who bore the technical risk?
R&D relief is intended for the company that is seeking to achieve the advance and resolving the uncertainty.
If a subcontractor is independently delivering a solution with little technical input or risk retained by the claimant, eligibility becomes more complex.
2. Who directed and controlled the work?
HMRC expects the claimant to have been actively involved in defining, supervising, and evaluating the R&D activity.
If the subcontractor simply delivered a finished product, it may look more like outsourced delivery than qualifying R&D.
3. UK vs overseas restrictions
Recent reforms restrict relief for certain overseas subcontracted activity unless specific conditions are met. This has made geographical location and justification more important than ever.
4. Connected parties
Transactions between connected companies are subject to specific rules and must reflect actual economic cost, not uplifted or circular arrangements.
5. Evidence and documentation
HMRC increasingly asks for:
Contracts and statements of work
Evidence of technical oversight
Clarification of who made key decisions
Breakdown of qualifying vs non-qualifying elements
Where documentation is weak or inconsistent, enquiries often follow.
The reality of subcontractor costs
Subcontractor costs are not inherently problematic.
But they must clearly demonstrate that the claimant company was seeking the technological advance and bearing the uncertainty, rather than simply buying in expertise.
Pause for thought
If your R&D claim includes subcontractor costs:
- Can you clearly explain why your company was undertaking the R&D?
- Do you have evidence of technical direction and oversight?
- Would the contractual terms support your position if reviewed?
- Have you considered whether any overseas restrictions apply?
In today’s compliance environment, subcontractor costs require more than inclusion, they require explanation.
