R&D tax relief and agencies: what you can claim when someone else writes the code.

First: is it R&D at all?

For tax purposes, a project is R&D only if it seeks an advance in overall knowledge or capability in a field of science or technology, not just in your own company, by resolving scientific or technological uncertainty that a competent professional in the field could not readily resolve (DSIT, Guidelines on the meaning of research and development for tax purposes).

HMRC's software guidance (CIRD81960) lists work that does not qualify, including configuring existing software, routine adaptation, assembling components using established patterns, business requirements gathering, look-and-feel work, user acceptance testing, deployment and maintenance. Work that may qualify includes novel algorithms, non-obvious combinations of technologies and extending frameworks beyond what they were designed to do.

Who makes the claim

Under the merged scheme, for accounting periods beginning on or after 1 April 2024, only the company that decides to undertake or initiate the R&D can claim (CIRD161000). If you commissioned work that you intended or contemplated would involve R&D, the claim is yours, and the agency cannot claim for the same work.

The agency can claim only where it took the initiative itself, for example when you bought a finished product and it did R&D of its own accord, or where you cannot claim. HMRC looks at the contract and the wider circumstances, including who owns the IP and who carries the financial risk (CIRD161000 and CIRD162000).

How much of the fee counts

If the agency is not connected to your company, you can include 65 per cent of the qualifying part of what you pay it (CIRD138000). The qualifying part is only the R&D work, not the routine build around it, so ask the agency to break down its invoices.

Where the work is done

Payments for R&D carried out outside the UK are generally excluded, and externally provided workers must be on a UK payroll. The only exception is where the conditions needed for the R&D do not exist in the UK. Lower cost and a lack of available staff are expressly not acceptable reasons (CIRD150500 and CIRD151100).

Rates and deadlines

• The merged scheme gives a taxable expenditure credit of 20 per cent.
• Enhanced R&D Intensive Support (ERIS) gives loss-making SMEs whose R&D is at least 30 per cent of total spend an extra 86 per cent deduction and a payable credit of up to 14.5 per cent.
• Notify HMRC within six months of the end of the period of account if your company has not claimed in the last three years (CIRD183000).
• Submit the additional information form before or on the same day as your Company Tax Return, or the claim will not be accepted.

SMEs can also ask HMRC for targeted advance assurance on up to two areas of a claim, such as overseas costs or contracted-out work, in a pilot running until May 2027.

What this means if you hire an agency

1. Decide early, with an adviser, whether the project genuinely involves R&D.
2. Write it into the contract: who is undertaking the R&D and who owns the results.
3. Ask where the work will be done, and keep records of the technical uncertainties and how they were resolved.
4. Ask for invoices that separate R&D work from routine work.
5. Make sure you own the IP, which helps show you undertook the R&D.

We keep technical records as standard, which makes an adviser's job easier, but we never tell clients a project will qualify. That is a judgement for you and your adviser.