New elections required for R&D contracted out within a group

A recent, poorly publicised aspect of the UK R&D tax relief changes impacts R&D ‘contracted out’ between group companies. Failure to comply with the new requirements could invalidate R&D claims, losing companies valuable benefits.

New intra‑group R&D claim rules under the merged regime

Under the previous RDEC scheme, companies could rely on established group provisions to determine which entity could claim R&D relief on activities contracted within the group. However, under the new merged R&D scheme, CTA 2009 s1142(5) introduces a more explicit compliance requirement.

The merged RDEC scheme introduces rules regarding ‘contracted out’ R&D to determine which entity should claim for work that is ‘contracted out’ between companies. As outlined in CIRD161000, the bias favours the company initiating the R&D to make the claim, rather than the company performing the R&D. Within groups, this means that the company claiming R&D relief might differ from the one that historically had claimed, potentially affecting existing charging mechanisms and financial planning.

Under the new rules, when a group company contracts another group company to carry out R&D, the contracting company should claim R&D relief. To revert to the original position, the contracting company must make a formal election to be treated as ineligible for that R&D, allowing the performing company (i.e., the company conducting the R&D activities) to continue claiming the relief.

Crucially, this election is now a prerequisite for the performing company to submit a valid R&D claim. Guidance on this is available at CIRD164000 although the form and procedure are poorly documented.

HMRC guidance on contracting company elections

Following a policy query raised by Moore Kingston Smith’s R&D team with HMRC, the response received confirms that:

• There is no prescribed form or template for making the election.
• HMRC expects the election to be made within the corporation tax computation, rather than via a separate “notice in writing to an officer of revenue and customs”.
• The computation should clearly specify:
  • The contracting company making the election; and
  • Its name and unique tax reference (UTR).

This election remains valid until it is revoked by a subsequent notice or the companies are no longer in the same group.

This creates a new compliance requirement that spans both the contracting and performing companies’ returns. In the absence of a valid election, HMRC may consider the performing company’s claim to be invalid, potentially resulting in the loss of significant cash benefits.

How to make the CTA 2009 s1142(5) election in practice

Although HMRC has not issued a standard format, a robust and defensible approach is to:

• Include a clear footnote or statement in the contracting company’s corporation tax computation confirming that it elects under CTA 2009 s1142(5) to be treated as ineligible for R&D contracted out to the named performing company.
• Include a corresponding explanatory note in the claimant company’s computation, confirming reliance on the group election to support its eligibility to claim.

Consistent, standardised wording across the group is recommended to reduce risk and ensure clarity. Please contact the Moore Kingston Smith R&D team if you require clarification.

The risk of not making the election when R&D is contracted out

If the election is not made, the contracting company may be treated as the eligible claimant, even if it did not carry out the R&D activity; and this may only be potentially identified after filing or claim notification windows have closed.

The performing company’s R&D claim may be challenged or rejected, creating:

• An increased risk of enquiry.
• Disallowance of relief.
• Potential penalties for inaccuracies.
• Delayed or denied repayments or tax credits.

Given HMRC’s increased scrutiny of R&D claims, failure to make this election could have material financial and compliance consequences.

Moore Kingston Smith can assist with:

• Drafting standardised group election wording.
• Reviewing your group’s R&D delivery and contracting model.
• Ensuring elections are correctly reflected in both companies’ tax computations.
• Confirming claim eligibility under the merged R&D scheme.

Expert R&D support

Our specialist team of scientists, engineers and tax advisers works collaboratively to identify qualifying R&D activity while also considering the wider tax and compliance implications under the merged regime. We regularly support groups with complex intra-group R&D structures and evolving HMRC requirements.

If you would like to discuss how these changes may affect your group, please contact us for an initial, no-obligation discussion.