Contractor costs are normally the second largest part of an R&D Claim. This blog post will help explain how much of your contractor costs your company can claim.
What is a contractor?
There are two types of contractors that qualify for R&D relief: subcontractors and externally provided workers.
Subcontractors are individuals or companies whom your company is outsourcing specific R&D activities. Specifically, to qualify for R&D relief, subcontractors must
- Be instructed with specific R&D activities to undertake
- Have the freedom to undertake R&D activities using any methods they choose
- Not to be directly supervised or integrated into your company
- Not be paid via payroll
Things to note:
- Qualifying subcontractors normally wouldn’t have a company email address, use company equipment, or have performance appraisals like full-time employees.
- Qualifying subcontractors don’t need to be based in the UK, and the work can take place anywhere in the world.
- Normally your company will retain any IP that the subcontractors develop.
- Subcontractors tend to work on a project basis and may be working on several projects simultaneously.
- The activities of subcontractors may be routine for the subcontractor and not R&D in isolation. However, the work will still count as R&D if it’s related to a project that is R&D.
Examples of subcontractors include:
- A lab testing samples
- An app development agency, developing a new app.
- An overseas manufacturing company that assists in the design and development of the product for manufacture
- A Consulting CTO providing ad-hoc advice on the development of your new algorithm
Externally Provided Workers
These are people who provide their services to your company from an external source. Typically workers of this type are either provided by an agency, umbrella company or personal service company.
Unlike subcontractors, externally provided workers are directly supervised and integrated into your company. This means that they normally have a company email address, use company equipment and have performance appraisals like full-time employees.
The only real difference to employees is that externally provided workers theoretically work for someone else and are being temporary loaned to your company.
Unlike subcontractors, externally provided workers must be provided by a company. If an externally provided worker is charging your company bills as an individual, they don’t qualify for R&D relief.
How much can I claim?
The first thing you need to do is calculate the total costs for your subcontractors. This is normally a simple case of adding together all the bills that they sent you in your accounting period that have been paid.
You should be able to determine this from your accounting software. If you use Xero, we here at Claimer will automatically be able to extract the figures for you per contact.
Top Tip - If you used multiple contacts for the same subcontractor in Xero, you can merge them together in Xero. See how to do this by clicking here.
The proportion of time spent on R&D
The next thing is to work out the proportion of time spent on direct and indirect R&D activities for every contractor. We normally recommend doing this by estimating the percentage of time spent on direct and indirect R&D activities. You can do this by reviewing records of what they did during the year. It is not unusual for a subcontractor to have spent 100% of their time on R&D activities.
Direct R&D activities are limited to the time spent resolving technical uncertainty. Although every R&D process is different, we’ve found that companies typically have 4 stages of an R&D project with only 2 stages that qualify.
|1 - Scoping||Initial activities such as concept ideas, market research having discussions with industry professionals.||No|
|2 - Development||The actual development of product/service e.g. coding, undertaking experiments, building prototypes.||Yes|
|3 - Testing||Practical or consumer testing e.g. strength testing, integration testing, resilience testing. Depending on the results of the test, further developement may be needed.||Yes|
|4 - Refinement||Final adjustments such as improving the look of your product/service (e.g. enhancing UX and UI).||No|
This comes as a happy surprise for many of our clients: you can also claim indirect R&D activities that support direct R&D activities. This includes:
- Finance (including paying people, leasing equipment etc.)
- Personnel activities
- Research (including related data collection) to devise new scientific or technological testing methods, where this research is not R&D in its own right
- Feasibility studies to inform the strategic direction of a specific R&D activity
Normally, to work out the qualifying amount you simply multiply the total cost by time spent by 65%.
For example, if you have a software agency whose total costs is £50,000, and the time spent on R&D was 100% of the contract, the qualifying amount is:
£50,000 x 100% x 65% = £32,500
However, the rules change if you are ‘connected’ with the contractor, e.g. they are an immediate family member, or the owner of the subcontracting business is related to any of your shareholders.
In that case, the qualifying expenditure is the lower of:
- the payment it makes to the subcontractor (without the 65% restrictions)
- The relevant expenditure of the subcontractor. Relevant expenditure, in this case, is the subcontractor’s own costs on staff and consumable items.
When using Claimer, the figures are automatically calculated for you based on the contractors and percentages you select.
If you have any questions, feel free to pop us a message on the live chat (bottom right), or send us an email using [email protected].
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