HMRC Backtrack on Subcontracted R&D Stance

On the back of two recent defeats by HMRC in the First Tier Tribunal,  last week HMRC issued new guidance in relation to the meaning of “subcontracted R&D” under the SME scheme.

The new (February 2025) guidance suggests a number of factors to be considered in determining whether R&D has been subcontracted to a company, and therefore not eligible under the SME scheme.  These factors, in order of weight, are:

• Whether the contracts and surrounding circumstances indicate that the customer required R&D to be undertaken or knew that R&D would be needed
• The degree of autonomy enjoyed by the person engaged
• The financial risk in any arrangements
• The ownership of the intellectual property

On the face of it, this appears to be at the very least a partial retreat by HMRC, whose last guidance in November 2021, on the same subject and the same legislation, said that “Any activities carried out in order to fulfil the terms of a contract are considered to have been contracted to the company”.

The new guidance is reminiscent of the pre November 2021 guidance, which listed the following aspects as useful in determining whether R&D had been subcontracted:

• The degree of autonomy enjoyed by the person engaged
• The ownership of the intellectual property
• The economic risk in any arrangements

Whilst the new guidance is much more in line with what had been the prevailing practice prior to 2021, it’s far from ideal for taxpayers that HMRC’s interpretation can change so much in less than four years, when the legislation in question hasn’t changed since first introduced in 2000.

There is an opportunity now for taxpayers to incorporate the new guidance in any open SME claims. However, given the difference in benefit between the SME and RDEC schemes, there will be many who have lost out on substantial amounts by following the 2021 to 2025 guidance and are now out of time to amend their claims.

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