HMRC’s new guidance on subcontracted & subsidised R&D: what businesses need to know

Recent Tribunal cases have exposed inconsistencies in HMRC’s previous interpretations, highlighting the need for clearer guidance. In response, HMRC have now published some much-awaited guidance on their updated definitions of criteria for ‘subsidised expenditure’ and ‘subcontracted’ – or ‘contracted out’ – R&D. Specifically, HMRC has updated two articles (27th February 2025) within their internal Corporate Intangibles Research and Development (CIRD) Manual – CIRD81650 for subsidised expenditure, and CIRD84250 for subcontracted R&D.  

Understanding HMRC’s latest guidance

In the aftermath of the landmark Tribunal decisions surrounding this issue (which also fell in favour of the taxpayer, rather than HMRC), cases such as Quinn (London) v HMRC, Collins Construction Limited v HMRC, and Stage One Creative Services v HMRC, necessitated new guidance, for everyone, on the classification criteria for assessing subcontracted and subsidised R&D.

The new guidance emphasises autonomy, financial risk and intellectual property ownership as key factors to consider. If these factors seem familiar, it’s because they constituted HMRC’s interpretation pre-2020, and their revised guidance posted in November 2021.

The new guidance refines how HMRC determines whether a company is conducting its own R&D or acting as a subcontractor. Instead of relying primarily on contract wording, HMRC now adopts a broader analysis: they assess the level of control a company has over the R&D activities, who bears the financial risk, and who owns the intellectual property. HMRC have also introduced ‘incidental R&D’ as a key factor to their determination framework.

Key factors in determining subcontracted R&D

HMRC has provided a list of key factors in order of weight:

• If the R&D is incidental to the supply of a product or service – HMRC’s view is that if this is the case the R&D is not contracted out
• If the company has a limited degree of autonomy - HMRC’s view is that if this is the case the R&D is more likely to have been contracted out
• The company has limited financial risk in undertaking the work - HMRC’s view is that the absence of financial risk points to a conclusion that the R&D was contracted out
• If the company does not retain IP rights to the product of the R&D project – HMRC would consider this contracted-out

In regard to subcontracted R&D, a company is more likely to be considered as conducting its own R&D if it retains autonomy over methods, decision-making, and the direction of the project. The presence of financial risk is another important factor, as if a company funds the work itself without a guaranteed payment, it supports the case that it is conducting its own R&D rather than acting as a subcontractor. Additionally, ownership of intellectual property resulting from the R&D is a key indicator.

How tribunal cases shaped HMRC’s new approach

In the Tribunal’s decision for Quinn (London) Limited v HMRC, Judge Morgan disagreed with HMRC’s interpretation of the “otherwise met” clause in s1138(1)(c) CTA09. HMRC’s argument centred on the fixed-price contract payment by one of Quinn’s customers meeting this definition so the R&D expenditure was being subsidised. If HMRC had won, the SME claim would have been denied but a claim under RDEC was possible. 

Interestingly, the Tribunal judge said if HMRC’s approach were to be adopted, the circumstances in which an SME could claim enhanced relief would be confined to those where it has no prospect of exploiting the R&D for commercial gain. 

In the FTT hearing for Stage One Creative Services v HMRC, the Tribunal noted these points on the contracted-out condition: 

1. Earlier guidance considered autonomy, intellectual property ownership, and financial risk as crucial to determining eligibility
2. The revised guidance narrowed the focus to contractual terms, suggesting a significant departure from past practice

On the subsidy condition, the Tribunal noted: 

1. The older guidance required a "clear and direct link" between payments and qualifying R&D expenditure but left this concept vaguely defined
2. The revised guidance explicitly tied payments under contract to qualifying expenditures, representing a notable change

Regarding the contracted-out condition, HMRC’s previous guidance was a narrow focus on contractual terms, rather than the previous interpretations by HMRC which focused on autonomy, intellectual property ownership, and financial risk. The new guidance issued on 27^th February 2025 returns to this previous interpretation with a focus on key factors to determine whether R&D activities have been contracted out. There is, however, one clear difference between this old and new guidance: the introduction of ‘incidental R&D’ as an additional factor.

It is worth noting that ‘Degree of Autonomy’, ‘Financial Risk’ and ‘IP’ were key factors in determining whether R&D had been contracted out (prior to Quinn, 2020 hearing) but were not considered after Quinn within HMRC’s flawed position.  

Final thoughts: how businesses can ensure compliance

HMRC appear to be taking a more contextual approach to their determination of whether R&D has been contracted out. They have provided a clear list of factors, in order of weight, that they will use. The new factor of ‘incidental R&D’ being weighted at the top of the list indicates the value that HMRC is giving to this factor. 

This is a double-edged sword, as whilst it has become clearer to understand the factors and evidence HMRC is using, they are now able to be a lot more specific to the evidence they require. For example, HMRC has clearly stated in CIRD84250 that this contextual approach could involve them looking at wider circumstances such as ‘correspondence or agreements between the claimant and the contractor’. This will make the importance of companies retaining correspondence and other documents even more significant.

In summary: businesses must ensure that they structure contracts correctly and document their control over the resultant R&D. The updated guidance offers greater clarity, flexibility and precision; but it also increases scrutiny, with more nuances to consider. If everyone – from taxpayer, to R&D agent, to the HMRC caseworkers themselves – can follow the guidance from now on, we’d expect there to be fewer Tribunal cases on this issue...and, dare we say it, no need for further updates from HMRC on their position.