The impact of ‘Connected Party’ relationships for R&D Tax Relief
What are ‘connected-party’ subcontractors or EPW's under R&D Tax Relief legislation?
How do connected party relationships impact my R&D Tax Relief claim?
With unconnected subcontractors and EPWs, 65% of the relevant R&D expenditure can be claimed, however, where a connection is identified, the usual ‘65%’ adjustment to qualifying expenditure on subcontractors and EPW’s no longer applies and we instead consider the ‘relevant expenditure’ incurred by the connected subcontractor or the EPW provider. Once the ‘relevant expenditure’ has been calculated, the value is compared to the payment made as part of a statutory connected parties test.
Whilst the ‘relevant expenditure’ calculation can include most of the cost headings we are familiar with for calculating R&D expenditure, one problematic area arises where a connected subcontractor further subcontracts compliant work out to an unconnected third party.
- From HMRC’s perspective, this work should have been directly subcontracted out by the claimant company without a connected intermediary involved.
- From a commercial perspective, in groups of companies, one company might have an existing commercial arrangement with the subcontractor and therefore be able to engage on better commercial terms then the claimant company.
As popular and logical as it may be, this commercial arrangement will cause the subcontracted R&D costs to fall outside of the costs allowable in a R&D claim.
It is worth noting that the claimant company and subcontractor / EPW provider can elect to be connected.
This joint election is irrevocable but, in cases where there is a high level of transparency between the two parties, can help maximise the claim benefit by allowing the removal of the 65% restriction. A thorough understanding of the ‘relevant expenditure’ and connected party rules are required in order to fully understand the advantages and disadvantages of making such an election, this is why it can be valuable to work with a R&D Tax Relief specialist like Innovation Tax, who has years of proven expertise dealing with complex areas within the R&D scheme legislation.
HOW CAN WE HELP?
It can be challenging to submit an R&D Tax Credit claim to HMRC’s exacting standards.
At Innovation Tax, our team of experienced sector specialists, technical and quality assurance experts and tax professionals will help you identify the full extent of your qualifying activities and expenditure and work with you to ensure the correct information is included in the claim documentation, giving you peace of mind that your claim is robust, maximised and defendable.