What is qualifying expenditure on sub-contracted R&D under section 104C of the Corporation Tax Act 2009?

Section 104C defines qualifying expenditure on sub-contracted R&D as expenditure by an SME company that satisfies two conditions simultaneously. Condition A requires the R&D to have been contracted out by a large company or a person not carrying on a chargeable trade. Condition B requires the expenditure to fall within section 104D or section 104E.

What is Condition A for qualifying expenditure on sub-contracted R&D?

Condition A requires that the R&D work was contracted out to the SME company by either a large company or by a person who does not carry on a chargeable trade. A chargeable trade is a trade carried on in the United Kingdom whose profits are subject to income tax or corporation tax. R&D contracted out by an overseas entity not trading in the UK could satisfy this condition.

What is Condition B for qualifying expenditure on sub-contracted R&D under section 104C?

Condition B requires the expenditure to fall within the rules of either section 104D, covering sub-contracted R&D undertaken in-house by the company, or section 104E, covering sub-contracted R&D that the company itself further subcontracts out rather than performing directly. Both Condition A and Condition B must be met for expenditure to qualify.

Can an SME subcontracted by another SME claim qualifying expenditure under section 104C?

Generally no. If the contracting party is another SME company carrying on a UK trade subject to corporation tax, Condition A is not met because that party is neither a large company nor a person who does not carry on a chargeable trade. The expenditure would therefore not qualify as qualifying expenditure on sub-contracted R&D under this section.

Corporation Tax Act 2009 section 104C

Qualifying expenditure on sub-contracted R&D

Section 104C defines what counts as "qualifying expenditure on sub-contracted R&D" for SME companies claiming R&D expenditure credits.

A company's qualifying expenditure on sub-contracted R&D must meet two conditions (A and B) simultaneously.
Condition A requires the expenditure to relate to R&D that was contracted out to the company by either a large company or by a person who does not carry on a chargeable trade.
A "chargeable trade" is a trade carried on in the UK whose profits are subject to either income tax or corporation tax.
Condition B requires the expenditure to fall within the scope of either section 104D (sub-contracted R&D undertaken in-house) or section 104E (sub-contracted R&D not undertaken in-house).

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