Are you Properly Claiming within the “Grey Areas” of R&D Relief? (Part 2)
In the second segment of our “grey” area discussion, we explore the circumstances of a contractual agreement for work between 2 SMEs, and the solution to the SME that is eligible to claim the R&D tax relief based on qualified activities.
Specifically, an SME may contract work with another SME to carry out work or a service. As a result, a grey area exists to which SME can make a claim; the SME who pays for the work or the SME that performs the work. HMRC will not allow R&D tax relief to be claimed by 2 companies so which SME is the rightful claimant?
In making this determination, an SME needs to review a variety of factors and make judgement, as the eligibility requirements for this grey area are not clearly defined.
The main criteria to review and analyze, include the following:
1. Who will own the Intellectual Property (IP)?
2. Who takes the business risk under the contract? Is it a fixed price contract or time and materials?
3. Is it a contract for services or goods?
Let’s look at an example, SME A contracts with SME B. The contract is for SME B to provide a software solution that has new or improved functionality but the specifications of the software design is set by SME A. The contract is set at a fixed price and there is a guarantee that the solution will meet certain functional requirements. In addition, there is no mention in the contract or any discussion surrounding the know-how SME B acquires in developing this software.
Essentially, this contract is for SME A to acquire a finished good. SME B retains any IP it develops or knowledge it has generated from development, and SME B is taking the business risk on the contractual agreement (ie, if they go over budgeted costs, they are incurring the losses). In this particular circumstance, SME B is the rightful claimant.
If the contract, however, mentions that SME A retains the IP, SME B was paid time and materials regardless if the software functioned appropriately, and SME B had no right to use the knowledge obtained from the developed solution, then SME A would be the rightful claiman and claim the amount paid to Company B for R&D tax relief.
There are, however, many situations that are not clearly defined, as the example stated. There are circumstances where a written contract does not exist or there could be situations where the criteria favour both parties. In these situations, judgement to determine the correct R&D assessment is necessary by RDP Associates Ltd. as we are the worldwide leader in R&D tax relief.
If you have any circumstances where these issues exist, please contact Lauren Parker at lparker@rdpassociates.com for more details.
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