Subcontractor costs in an R&D claim look simple on the surface. You paid an outside firm to do some of the technical work, so you add the invoice to the claim. In practice, it is one of the areas where we most often see claims overstated, understated, or built on the wrong assumptions.
This is not because business owners are careless. The rules sit in an awkward place. They depend on who made the decisions, who carried the risk, where the work took place and whether the two companies are connected. None of that is visible on an invoice.
Three questions that decide the treatment
Before a subcontractor invoice goes anywhere near a claim, three questions need to be answered.
1. Whose R&D is it? When one company contracts out R&D to another, the question is which party decided to undertake the project and carried the commercial risk. If you commissioned the work to solve your own technical problem, the project is generally yours. If a customer commissioned you to deliver something and you passed part of it on, the picture changes, and it can differ again depending on the contract terms. Two companies cannot both claim the same expenditure.
2. Is the work actually R&D? A subcontractor’s invoice for building a prototype is only relevant if their work forms part of resolving a scientific or technological uncertainty. A machining shop producing a standard component to your drawing is usually providing a service, not carrying out R&D on your behalf. A specialist testing house characterising a new material for you may well be.
3. Who is the subcontractor, and where did the work happen? Connected parties are treated differently from unconnected ones, and the rules around work carried out overseas have tightened in recent years. A supplier that shares a director or shareholder with you is not something to discover during an HMRC enquiry.
The mistakes we see most often
• Claiming the full invoice. Only a proportion of qualifying subcontractor payments is generally eligible, not the whole amount. Treating the invoice total as the claim figure overstates it.
• Confusing subcontractors with externally provided workers. Individuals supplied through an agency and working under your direction are a different category with their own rules. Putting them in the wrong line changes the figure and invites questions.
• Including non-R&D work. A project invoice often bundles design, build, testing and installation. Only the part that relates to the qualifying activity belongs in the claim, so you may need to split the invoice.
• No evidence of what the subcontractor did. An invoice that says “development services, £18,000” tells HMRC nothing. If an enquiry follows, you will be asked what the work was, what uncertainty it addressed and how it ties to your project.
• Missing the claim altogether. The opposite error is just as common. Businesses that rely heavily on specialist outside engineering support sometimes leave those costs out because nobody asked about them.
Why it matters more now
HMRC has been paying close attention to the quality of R&D claims, and cost categories are part of that scrutiny. An unexplained subcontractor line is an easy place for a compliance check to start. The cost is rarely the largest in a claim, but it is often the one with the thinnest paper trail.
The practical answer is to collect the right information while the work is happening: a short description of what the subcontractor was asked to do, which project and technical problem it related to, whether they are connected to you, and where they carried out the work. Five minutes now saves weeks later.
How we approach it at Vantage
Our team has an engineering background, so we can read a subcontractor’s scope of work and judge whether it was genuine technical development or routine supply. We go through supplier ledgers line by line, separate out the qualifying element, check the connected-party position, and write up what the work contributed to the project. Because we extract costs directly from your accounting software, you are not asked to fill in templates.
If you rely on outside specialists, a quick review of how those costs have been treated in a past or planned claim is often worthwhile. We would rather tell you honestly what holds up than see a figure you cannot defend.
Talk to us
If you would like a second pair of eyes on subcontractor costs in your R&D claim, there are two simple ways to get started.
Book a no-obligation call with John or Jason: www.vantagernd.co.uk/book/
Send us a brief overview of your projects for a free Loom video review: www.vantagernd.co.uk/review-your-project/