Subcontracting Under the Merged R&D Scheme: What Changed and What You Need to Know

If you've historically claimed significant subcontractor costs under the old SME R&D scheme, the merged R&D scheme applying to accounting periods beginning on or after 1 April 2024 has fundamentally changed the landscape.

Under the Finance Act 2024 (Part 1, Chapter 1), Part 13 of the Corporation Tax Act 2009 has been overhauled, consolidating the SME and RDEC schemes into a single framework. The central principle is that relief follows the decision-maker – the company that contracts out the R&D and drives the innovation.

If you cannot demonstrate that your company was calling the shots on the R&D, you are at serious risk of losing relief on subcontractor costs.

The Merged Scheme at a Glance

For accounting periods beginning on or after 1 April 2024:

• Standard Relief: A 20% R&D Expenditure Credit (RDEC-style), giving an effective post-tax benefit of around 15–16.2%, depending on your corporation tax rate.
• Enhanced R&D Intensive Support (ERIS): For loss-making SMEs with R&D expenditure at or above 30% of total expenditure, there is an additional 86% deduction (total 186%) plus a payable credit of up to 14.5% of surrenderable losses.

Unlike the old SME scheme—where unconnected subcontractor costs generally qualified at 65%—the merged scheme is designed to ensure relief lands with the entity genuinely driving the innovation. HMRC’s Corporate Intangibles Research and Development Manual (CIRD84200 and related sections) sets out the qualifying expenditure categories, with February 2025 updates clarifying subcontracting and subsidisation.

These rules differ sharply from both the old R&D‑intensive SME scheme and the standalone RDEC scheme, which heavily restricted subcontractor costs (for example, largely to qualifying bodies). Subsidised expenditure rules have also been reformed, removing many barriers for grant‑funded projects but introducing stricter tests for contracted‑out R&D.

Key Rules for Subcontracting Under the Merged Scheme

Subcontracted R&D expenditure can qualify under CTA 2009 ss 1042E and 1053, but only where specific conditions are met.

Who Can Claim?

In general, the principal – the company that contracts out the R&D and makes the key decisions – is the one that claims. The subcontractor cannot claim for the same activities. HMRC enforces this strictly to prevent double‑claiming.

Exceptions where the subcontractor can claim include:

• The principal is an ineligible body (for example, charities, universities, or overseas corporates that are not within the UK corporation tax net – see CTA 2009 s 1142 and extensions).
• In UK group situations, a joint election can be made to treat the principal as ineligible, allowing the subcontractor to claim instead (Finance Act 2024, Sch 1).

R&D is treated as contracted out where:

1. There is a contract for activities.
2. Those activities include R&D.
3. It was reasonable to assume, at the time of contracting, that the principal intended or contemplated that R&D would be required.

This is assessed using the contract terms and wider circumstances, including IP ownership, financial risk, autonomy, and decision‑making. This replaces the old CTA 2009 s 1133 definition.

Allowable Subcontractor Costs

Unconnected subcontractors

• Relief is generally restricted to 65% of the payment attributable to R&D (CTA 2009 s 1134).

Connected subcontractors

• Relief is the lower of:
• the payment made, or
• the subcontractor’s actual relevant R&D expenditure (CTA 2009 s 1136).
• Further subcontracting by connected parties is not permitted for relief purposes.