Connected vs. Unconnected Subcontractors

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 a legal relationship of control over your company.  This relationship is much wider than just direct ownership. You can read more about the definition of connected parties with HMRC’s guidance here. 

A subcontractor is considered connected to your company if:

• Company to Company Connection: The same person (or person together with their connected family/partners) controls both your company and the subcontractor company.
• Person to Company Connection: The person (or person together with their connected family/partners) has control of your company.

For expenses made on connected subcontractor for R&D, the company can claim the lower of -

• Payment that it makes to the subcontractor

• 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.