This article explains the difference between connected and unconnected subcontractors, and how each affects your R&D claim.
For most subcontractors performing R&D activity, only up to 65% of the R&D expenditure on them is eligible. However, there may be some exceptions to this if the subcontractor is connected to the company. This article will cover the difference between connected and unconnected subcontractors and how that affects your R&D claim.
Unconnected Subcontractors
Costs incurred on 3rd parties subcontractors to undertake R&D activity on behalf of the company can be R&D eligible costs. Up to 65% of these costs can be included in the total qualifying costs for the R&D claim. These 3rd parties can include another company or individual(s) and do not need to be UK residents.
In instances where only part of the work done by the subcontractor counts as R&D activity, only a proportion of their costs are considered R&D eligible expenditure.
Connected Subcontractors
Connected parties refer to those who have ownership and control over your company. 2 companies are connected when they have the same shareholders and the same person(s) has control of the company. A person is connected to the company if that person has control of the company.
For expenses made on connected subcontractor for R&D, the company can claim the lower of -
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Payment that it makes to the subcontractor
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Relevant expenditure of the subcontractor
If you are not sure whether your subcontractor is connected to your company or not, feel free to contact us and we will be happy to discuss this further.