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Article:

Whose R&D is it? A recap of the basic rules

07 February 2020

One of the more common mistakes seen in R&D claims, is the R&D being claimed by the wrong entity in situations where more than one party is involved.

To assist with the assessment of ‘Whose R&D Is It?’ We have set out two key questions, some summary tables and a recap of the basic rules.

Clearly it is not possible to cover every potential scenario, so we have focused on those most commonly encountered in practice, where two companies are involved. There are separate rules for arrangements with qualifying bodies, individuals and partnerships, which are not covered here.

Question 1: Is the potential claimant company a SME or Large for R&D purposes?

There are separate rules for small and medium sized companies, (SMEs), and Large companies as determined by the R&D legislation. Consequently it is important to understand which set of rules the potential claimant entity falls within.

Where the company is part of a group, or minority interests or private equity / venture capital organisations form part of the ownership structure then the SME / Large company determination can quickly become complex and specialist advice is recommended.

SME Companies

SMEs carrying on qualifying R&D activities can, broadly speaking, fall into a number of categories as set out in the table below.

Which of these categories the company falls into can often be established through a combination of a discussion with the claimant entity and review of the relevant contracts between the parties developing the product / service and those with the end customer.

The table below sets out some of the characteristics for each category and the impact on any R&D claim:

Scenario

Characteristics

Impact on R&D claim

Own account R&D

Provision of a service or deliverable

Development of a product or process without a specific customer in mind

New knowledge acquired and retained by the company

Claims can generally be made under the SME scheme

Collaborative R&D

Each party works on their own component of the R&D and bears their own costs.

Outcomes / conclusions are shared.

Each party claims their own costs under the SME scheme

Funded / subsidised R&D

The company is carrying out R&D on its own account but some or all of it is directly funded by a third party – as evidenced often by a contract between the two parties.

Ownership of the IP may be split for the funded and non- funded elements

The ‘funded’ costs can be claimed under the RDEC.

The costs borne by the entity itself can be claimed under the SME regime.

Subcontracted R&D

Bears financial risk for the development work

Has autonomy on how the work is carried out

May own the IP generated by the activities

If the party subcontracting the work is a LARGE company or outside the scope of UK tax, the SME can claim under RDEC

 

If the subcontractor is a SME no R&D claim can be made – it belongs to the subcontractor

Externally provided workers

Company providing staff to work on the other party’s project and under their supervision, direction or control

Little or no financial risk, work is often charged on a time and materials basis

No R&D claim can be made – it belongs to the other party


It is crucial to note that there are no specific ‘group rules’ applicable to SME claimant groups. Each potential claimant company needs to assess its own facts and circumstances.

Large companies

Question 2: Is the company part of a Group?

There is special R&D legislation that applies where a company is part of a Group. Group, in this context, should satisfy Group relief requirements, i.e. there needs to be 75% or greater direct or indirect beneficial ownership of the ordinary share capital in the other.

Non-group companies

Again there are five possible R&D outcomes, each of these and the factors that indicate towards them are set out below. (You will note that these are broadly the same as for SMEs).

Scenario

Characteristics

Impact on R&D claim

Own account R&D

Provision of a service or deliverable

Development of a product without a specific customer in mind

New knowledge acquired and retained by the company

Claims can generally be made under the RDEC scheme

Collaborative R&D

Each party works on their own component of the R&D and bears their own costs.

Outcomes / conclusions are shared.

Each party claims their own costs under the RDEC scheme

Funded / subsidised R&D

The company is carrying out R&D on its own account but some or all of it is directly funded by a third party – as evidenced often by a contract between the two parties

The qualifying expenditure can be claimed under the RDEC, regardless of whether it is subsidised.

 

Subcontracted R&D

Bears financial risk for the development work

Has autonomy on how the work is carried out

May own the IP generated by the activities

If the party subcontracting the work is a LARGE company or outside the scope of UK tax, a claim can be made under RDEC

 

If the subcontractor is a SME no R&D claim can be made – it belongs to the other party

Externally provided workers

Company providing staff to work on the other party’s project and under their supervision, direction or control

Little or no financial risk, work is often charged on a time and materials basis

No R&D claim can be made – it belongs to the other party


Group companies

In addition to the table above, which also applies to Large companies that form part of a group, where a group company, (A Ltd), subcontracts an element of a R&D project to a fellow group company that is tax resident in the UK, (B Ltd), that company, (B Ltd) can also make a R&D claim for its qualifying costs.

The element of the R&D project that is subcontracted does not need to be R&D itself, it can for example be testing that is ‘absolutely necessary’ for the conduct of the R&D project.

In addition, the relevant costs need not be paid by the subcontracting group company, (A Ltd).

The above guidance is also relevant where the situation is turned round, for example when looking at the subcontracting entity, or the entity using externally provided workers. In this instance if third party costs are to be included in the R&D claim, additionally, they must be paid by the time the R&D claim is submitted. In a group scenario it is important that balances are not left unsettled on intercompany accounts.

And as to which R&D claim takes priority in a group situation, this will depend on the specific facts and circumstances, but will often require internal discussions to ensure that as a whole the group claims for all eligible qualifying expenditure and that there is no overlap or underlap in R&D claims.

For more details contact Carrie Rutland.