Contractors and subcontracted R&D
The cost of work bought in from outside varies more between the seven schemes than any other line. This guide gives the method that holds everywhere, the records that support contracted costs, and each scheme's percentage, cap and location rule in its own words.
No part of a claim varies more between the seven schemes than the cost of work bought in from outside. The same invoice can enter a claim at 65 percent of its value in one country and 80 percent in another, be capped by reference to your own spending in a third, and count for nothing in a fourth because the work was done abroad. Each scheme asks who bears the risk and owns the results, and where the work was physically done, then attaches its own percentage, cap or location test.
The method that holds everywhere: label the cost, settle who may claim, establish where the work was done, apply the scheme's percentage or cap as a separate step, and hold the records that prove each answer.
What this guide covers
- Four kinds of externally sourced work and why the label matters.
- Connected and unconnected parties.
- Who may claim when work is done for someone else.
- Overseas work and how location is tested.
- The records that support contracted costs, and each country's rules.
Four kinds of externally sourced work
Label every externally sourced cost first, because the schemes attach different rules to each label. Subcontracted work: another business does a defined part of the work on your behalf, at your financial risk. Externally provided or agency workers: people supplied by a staffing business who work under your direction; the schemes that address them treat the payment to the provider as contract cost or at a percentage, not as your own staff cost. Universities and research bodies: separate caps or percentages in several schemes. Your own employees abroad: excluded, allowed up to a small percentage, or unrestricted, and never on the same rule as subcontractors.
Agency workers are the most common mislabel: because they sit at your desks and report to your managers, they are often run through the staff cost calculation. The United States wording, for example, treats payments to a staffing firm for workers who are not the taxpayer's employees as contract research expenses subject to the 65 percent limit, rather than wages.
Connected and unconnected parties
Several schemes treat a payment to a connected party differently from a payment at arm's length, because a fixed percentage applied to an intra-group invoice would otherwise let a group set its own claim. The United Kingdom, Ireland and Canada rules in the country table all depend on whether the parties are connected. In Australia, expenditure incurred to an associate is notionally deductible only when it is paid.
So map the ownership of every vendor at the start of the year, mark each as connected or unconnected under the scheme's test, and for connected providers keep the provider's own cost records, on which the claim may depend. Intra-group agreements should be written, dated and priced before the work starts.
Who may claim when work is done for someone else
Most schemes allow only one party to claim for the same work, and they decide which with recurring tests: who bears the financial risk, meaning who pays whether or not the work succeeds; who owns or has substantial rights to the results; and whether the customer intended or contemplated that work of that kind would be done. The country table gives each scheme's wording. Ireland adds a procedural step: the company must notify the unconnected subcontractor in writing that it is claiming.
In practice, read every vendor contract for three clauses before the cost is scheduled: payment terms (a fixed or milestone fee as against payment contingent on success), rights to the results, and scope. Record the conclusion for each vendor in the claim file. Read in reverse, the same clauses decide whether work your company does for a customer can be claimed by you.
Overseas work
Location rules attach to where the work is physically performed, not to where the contractor is incorporated or where the invoice is addressed. The seven schemes range from exclusion through a margin or an advance finding to a base deduction only; the country table sets out each.
Because the test is physical, the contract should state the place of performance and the evidence should be collected while the work is going on: activity logs, site records, travel records and the location of test facilities. A contractor in your own country that sends part of the work to a laboratory abroad has moved that part across the line, and the invoice will not say so unless you ask.
The records that support contracted costs
| Record | What it shows | When |
|---|---|---|
| Signed agreement dated before the work starts, with statements of work | Scope and project; work done on your behalf; payment not dependent on success; rights to the results; place of performance | At engagement |
| Connection analysis | Whether the provider is connected under the scheme's test; for connected providers, their own cost records | At engagement, reviewed yearly |
| Invoices coded to the project, with proof and date of payment | Period, description and amount tied to the project code | Monthly |
| Location evidence | Where each part of the work was physically performed | During the work |
| Notifications and applications | Telling the subcontractor you are claiming, or applying for a finding, where the scheme requires it | By the scheme's deadline |
| The calculation step | Full invoice value, the percentage or cap applied, and the resulting figure | At year end |
Illustrative example
Illustrative example. Corran Castings Ltd, a hypothetical company, pays an unconnected engineering firm 200,000 under a fixed fee agreement, signed before the work started, to design and test a mould cooling system for an eligible project. Corran Castings owns the results and the firm works in the same country, so Corran Castings bears the risk and is the party that claims. Its own qualifying spend on the project is 500,000. United States: 65% of amounts paid for qualified research performed for you, so 130,000 (United States). United Kingdom: 65 percent of payments to an unconnected subcontractor for contracted out R&D, so 130,000 (United Kingdom). Ireland: the greater of 15 percent of the company's own qualifying expenditure and €100,000; 15 percent of 500,000 is 75,000, so the cap is 100,000 and 100,000 of the 200,000 qualifies, provided the firm is notified in writing and does not also claim (Ireland). Canada: 80 percent of arm's length contract payments, so 160,000 (Canada). The benefit on each figure is calculated at that country's rate. Had the firm run its tests at a laboratory abroad, that part of the invoice would enter at zero in the United States.
Country differences
The linked page holds conditions and exceptions.
| Country | Contracted work and agency staff | Overseas work | Detail |
|---|---|---|---|
| United States | Contract research: 65% of amounts paid for qualified research performed for you. The agreement must be entered into prior to the performance of the research, the research performed on behalf of the taxpayer, and the taxpayer bears the expense even if the research is not successful. | Research conducted outside the United States is among the exclusions. Contract research expenses qualify only to the extent the research is conducted within the United States. | Qualified research expenses |
| United Kingdom | 65 percent of payments to an unconnected subcontractor for contracted out R&D qualify; connected party payments are limited to the subcontractor's relevant expenditure. 65 percent of payments to an unconnected staff provider for externally provided workers qualify; where the provider is connected, the lower of the payment and the provider's relevant expenditure. | For accounting periods beginning on or after 1 April 2024, relief for contracted out R&D and externally provided workers is generally limited to work carried out in the UK; the restriction does not apply to the claimant company's own staffing costs. Overseas work qualifies only where conditions necessary for the R&D are not present in the UK, are present where the work is done, and it would be wholly unreasonable to replicate them in the UK. | Subcontracting and overseas costs |
| Ireland | Expenditure on R&D activities carried on by an unconnected person on behalf of the company qualifies up to the greater of 15 percent of the company's own qualifying expenditure and €100,000, provided the person does not also claim. Expenditure paid to a university or institute of higher education qualifies up to the greater of 5 percent of the company's own qualifying expenditure and €100,000. | Expenditure qualifies where the R&D activities are carried on within the State or another EEA state, and the expenditure is not relieved against tax in another territory. | Eligible expenditure |
| Canada | Only 80 percent of arm's length contract payments and third-party payments for SR&ED are included in qualified expenditures. A contract payment received by a performer reduces the performer's qualified expenditures, so that the payer rather than the performer claims the credit. | Salary or wages for SR&ED carried on outside Canada by employees resident in Canada can be included up to 10 percent of the total salary or wages for SR&ED carried on in Canada in the year, where the work outside Canada is part of the SR&ED carried on in Canada. | Eligible expenditure |
| Australia | Expenditure is not eligible where the R&D activities are conducted to a significant extent for another entity, or where another entity bears the financial risk and effectively owns the results. | R&D activities conducted outside Australia are eligible only where covered by an Overseas Finding that the activity has a significant scientific link to Australian core activities, cannot be conducted in Australia for a listed reason, and overseas expenditure is less than Australian expenditure. The application must be made before the end of the income year in which the activities are conducted. | Advance and overseas findings |
| New Zealand | Expenditure on a contractor performing R&D on behalf of the claimant is eligible for the claimant; the contractor cannot claim for the same activities. Expenditure on R&D performed for another person is ineligible. | Eligible expenditure on R&D performed outside New Zealand is limited to 10 percent of the total eligible expenditure for the year and must relate to R&D that is integral to a core activity performed in New Zealand. | Eligible expenditure |
| Singapore | For R&D outsourced to an R&D organisation in Singapore, IRAS treats a fixed portion of the fee (60 percent) as qualifying staff costs and consumables. | Expenditure on R&D undertaken outside Singapore is deductible at 100 percent under section 14C where the R&D is related to the trade, and does not qualify for the additional deductions under section 14D. | R&D done in Singapore vs overseas |
Related pages
- Module 4: Contractors and overseas costs
- Module 2: Cost capture
- United Kingdom: subcontracting and overseas costs
- United States: funded research exclusion
Educational material, not advice. Eligibility and treatment depend on the scheme and the facts.
Sources
- Treasury Regulation 1.41-2, Qualified research expensesElectronic Code of Federal Regulations (US Government Publishing Office)
- R&D tax relief: the merged R&D expenditure credit scheme and enhanced R&D intensive supportGOV.UK (HM Revenue and Customs)
- Taxes Consolidation Act 1997, section 766Irish Statute Book (Office of the Attorney General)
- Income Tax Act, section 127Justice Laws Website (Government of Canada)
- Apply for an Advance or Overseas Findingbusiness.gov.au (Department of Industry, Science and Resources)
- Income Tax Act 2007, subpart LYNew Zealand Legislation (Parliamentary Counsel Office)
- Research and Development (R&D) expenditureInland Revenue Authority of Singapore
Educational content only, not tax advice. Rules change and eligibility depends on your circumstances, so check the official guidance or speak to a qualified advisor before you claim. See the disclaimer.