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Claiming R&D Tax Credits for Subcontracted Work

For most companies carrying out R&D, they can’t do it all; some of the work isn’t possible in-house and therefore needs to be outsourced.

If you're outsourcing elements of your research to specialists, contractors, or universities, you might be wondering: can I still claim R&D tax credits for this work?

The short answer is yes, but there are limits and specific rules you need to follow.

The core principle: R&D must be "carried on by" your company

Revenue’s R&D corporation tax credit legislation is quite particular about one thing: qualifying activities must be "carried on by" your company. This means the work needs to happen within your business, not just be commissioned by it.

So, when you pay someone else to undertake R&D on your behalf, you're entering territory where the rules tighten. Revenue wants to ensure that companies claiming the credit are genuinely undertaking innovation themselves, not simply funding someone else's research.

That said, the legislation does recognise that bringing in external expertise is often essential for innovation. The key is understanding where the boundaries lie.

You should be carrying out the project yourself and outsourcing where needed. Revenue does not specify an amount of the work that you need to do to qualify, but they do impose limits on the amount of outsourced work you can claim, to ensure that the spirit of the guidelines is upheld.

Two types of outsourced R&D you can claim for

There are two scenarios where you can claim R&D tax credits for outsourced work:

1. Payments to universities or institutes of higher education
2. Payments to third-party contractors

In both cases, you must be spending at least the same amount on your own qualifying R&D activities to claim this relief.

There was discussion about increasing the limits to better match the reality of industry, but this has not yet manifested.

Payments to universities or institutes of higher education

If you pay a university or third-level institution to carry out qualifying R&D activities within the EEA or UK, you can claim relief. The limit is the greater of:

• 15% of your own in-house R&D expenditure, or
• €100,000

For example, if your company spends €2 million on R&D activities internally, you could claim up to €300,000 (15% of €2 million) paid to a university. If you only spend €500,000 internally, you could still claim up to €100,000 paid to the university.

Payments to third-party contractors

When you pay another person or company (not a university) to carry out qualifying R&D for you, the same limits apply:

• 15% of your own in-house R&D expenditure, or
• €100,000 (whichever is greater)

There's one important restriction: the contractor cannot be a connected person. This means you can't claim for work outsourced to a company you control or that controls you.

These limits apply separately

It's worth noting that the limits for universities and third-party contractors are calculated separately. You could, in theory, claim up to 15% of your in-house spend for payments to universities and up to 15% for payments to unconnected contractors (a total of 30%), provided both meet the qualifying criteria.

What about agency staff?

Agency staff present a different challenge. When you use recruitment agencies to provide personnel, this is generally considered outsourcing, and the costs are subject to the limits for third-party contractors.

However, there's an exception for individual consultants who meet specific conditions. If the individual:

• Works under your company's control and direction
• Works on your premises
• Contributes specialist knowledge your in-house team doesn't have
• Is engaged for no more than six months

Then their costs can be treated as direct staff costs rather than outsourcing. This means they fall outside the restriction, and their R&D costs can be claimed fully, so long as they are properly apportioned.

The outsourced work must be your qualifying R&D

Here's a crucial point that often gets missed: the outsourced activity must constitute qualifying R&D activity for your company, not necessarily for the subcontractor.

In some cases, the work that you outsource to another company may be routine to them. For example, the development of a new pharmaceutical may need to be stability tested by a third party. The testing facility is used to testing new pharmaceuticals and is not trying anything novel or unknown by running its test, however this work is generating new knowledge for the pharmaceutical development company.

You must notify the subcontractor

Before making a claim for subcontracted costs, you're required to notify the subcontractor in writing that they may not claim the R&D tax credit for the same work. This notification must be made in advance of the payment or on the date the payment is made to the subcontractor.

There's a practical exception here: if the subcontractor couldn't claim the credit anyway (for example, they're an individual or a non-resident third party without an Irish branch), Revenue accepts that notification isn't required.

Getting subcontracting claims right

When you're working with external partners on R&D, documentation becomes even more important. You should retain:

• Copies of contracts or task assignments showing the work to be undertaken
• Invoices for the amounts paid
• A brief outline of the qualifying activities carried out
• Copies of the notifications issued to subcontractors

If you're pushing up against the 15% limit, make sure you can demonstrate how you've calculated both figures.

Is your outsourced R&D claim compliant?

The rules around subcontracted R&D are more nuanced than they first appear. Getting them wrong can lead to disallowed claims, penalties, and the administrative burden of correcting past returns.

If you're unsure whether your subcontracting arrangements qualify, or if you want to maximise your claim while staying compliant, we can help. Get in touch with our team to discuss your R&D tax credit claim.