HMRC has issued a significant update to its R&D tax relief guidance on subcontracted work, signalling a notable change in approach following a series of First-Tier Tribunal (FTT) losses. The revised guidance marks a shift away from the stricter position adopted in recent years and brings the department closer to the stance it held prior to late 2021.

This latest development represents a more flexible, case-by-case approach, moving away from the previous blanket view that SMEs could not claim R&D tax relief when acting as subcontractors. Instead, HMRC will now consider a range of factors to determine who is entitled to claim.

Key Factors That Now Influence Claim Entitlement

The updated guidance outlines several key considerations that HMRC will assess when determining whether a customer or subcontractor holds the right to make a claim. These include:

• Contractual Terms – Does the contract explicitly outline the subcontractor’s responsibilities relating to R&D?
• Customer Awareness – Was the customer aware that R&D would be needed to complete the work?
• Subcontractor Autonomy – Did the subcontractor have control over how the R&D activities were carried out?
• Financial Risk – Who assumed the financial risk associated with the project?
• Intellectual Property Ownership – Who owns any resulting IP from the R&D activities?

These criteria reflect a more balanced and analytical method, where HMRC will review the specific commercial arrangements involved, rather than applying a rigid rule across the board.

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What About Previously Rejected Claims?

One of the pressing concerns raised by this change is its impact on historical claims.

Many businesses that were previously denied relief based on the old subcontracting interpretation may now fall within the scope of this updated guidance. However, due to expired claim deadlines, some may no longer be able to amend or resubmit those claims. Others may have chosen not to claim at all, deterred by HMRC’s earlier position.

It remains unclear whether HMRC will introduce any measures to allow these cases to be revisited under the new guidance. The industry will be watching closely to see if fair and practical solutions are offered to affected businesses.

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