Can you claim subcontractor costs for R&D tax relief?

What counts as “subcontracted R&D”?‍

For accounting periods beginning on or after 1 April 2024, the subcontractor rules changed in a big way. The key principle is that only the company that decided the R&D needed doing can claim the relief. HMRC’s guidance explains that the claimant must be able to evidence it made the decision to carry out the R&D and planned the R&D.  

This applies regardless of whether you are claiming under the merged R&D tax relief scheme or ERIS. HMRC’s merged scheme guidance confirms the qualifying expenditure rules are aligned across both routes.  

Subcontractors vs externally provided workers

HMRC draws a line between:

• Subcontractors (contractor payments): you pay a third party to deliver a piece of work or an outcome.
• Externally provided workers (EPWs): individuals supplied by a staff provider or agency, where the provider operates PAYE in relation to the worker (the EPW definition is rooted in the agency worker rules).  

The distinction matters because the evidence you need is different. Subcontracting is about what the contract required and who was calling the shots. EPWs are more about who employed the worker, how they were supplied and what activities they performed.

The decision maker test

HMRC’s current guidance is clear that the ability to claim subcontractor costs depends on whether your company was the decision maker for the R&D. In other words, did you decide that R&D was needed and did you plan it, rather than simply delivering whatever a customer specified.  

HMRC’s internal manual expands on how this is assessed in real life. It focuses on whether it is reasonable to assume the customer intended or contemplated that “R&D of that sort” would be carried out when they entered the contract, taking the contract terms and surrounding circumstances into account.  

When you can claim subcontractor costs

You can normally claim subcontractor costs where you are the company contracting out your own R&D and you can show:

• You decided the R&D needed to happen
• You planned the R&D activity
• The subcontracted work forms part of your qualifying R&D project
  

HMRC’s “check what R&D costs you can claim” guidance spells out the decision and planning requirement for contractor payments for periods starting on or after 1 April 2024.  

When you cannot claim subcontractor costs

You are at higher risk where the facts suggest the R&D was contracted out by someone else, or where you were effectively paid to deliver a specified R&D outcome that the customer expected would require R&D.

HMRC’s examples show how a detailed specification for R&D work can point to the customer intending that R&D of that sort would be done, which can mean the customer can claim and the contractor cannot.  

R&D done to fulfil a contract

This is where the nuance lives. You can sometimes claim even when you are working under a customer contract, but only where the work you undertook was not R&D “contracted out” to you by the customer. HMRC’s examples describe scenarios where the customer did not intend any R&D, but the contractor later undertook R&D to overcome an unexpected technical problem and could still claim.  

The practical takeaway is that you need to be clear on what the customer bought. Was it an outcome that obviously required R&D, or did R&D arise because you chose an innovative route or hit an unforeseen technical constraint?

Overseas subcontractors and overseas EPWs

Overseas restrictions apply to certain R&D expenditure, including contractor payments and EPWs, unless an exception applies. HMRC’s guidance sets out an exception where R&D must be carried on abroad because there are conditions necessary for the R&D that are not present in the UK, are present overseas, and it would be wholly unreasonable to replicate them in the UK.  

HMRC is also explicit about what does not count. Conditions linked to cost or availability of workers are disregarded for this test.  

What HMRC expects you to evidence

Subcontractor eligibility is usually proved through a combination of contract terms and real world evidence. HMRC make it clear that “intended or contemplated” can depend on both the contract and surrounding circumstances.  

In practice, keep:

• The signed contract, statement of work, and any variations
• Evidence of who set the technical direction (plans, designs, test plans, decision logs)
• Proof the work was part of your R&D project (project narrative, uncertainties, iterations)
• Invoices and payment records, clearly mapped to R&D activities
• For overseas work, a written justification aligned to the “necessary conditions” test
  

Common mistakes we see

A lot of problems come from treating subcontractor spend like a simple cost category. Under the merged scheme, you need the story to match the rules. Claims get messy when the contract suggests the customer specified the R&D, when project descriptions do not match what was contracted, or when overseas work is included without a proper “necessary conditions” rationale.

If you are unsure whether subcontractor spend qualifies, start with the contract and who made the R&D decisions, then work back to the evidence. Getting that story straight early makes the claim clearer, more compliant and far easier to defend if HMRC asks questions later.