HMRC’s new guidance on contracted out and subsidised research and development

Nearly six years ago a question was raised in an enquiry case I was handling. It dealt with contracted out research and development (R&D) and whether payments from customers subsidised underlying R&D expenditure. This question marked the beginning of a prolonged dispute that has significantly influenced the landscape of small and medium-sized entities (SME) R&D tax relief.

Fast forward to February 2025 and the publication of updated HMRC guidance in its Corporate Intangibles Research and Development Manual on these issues signals a potential conclusion to this dispute and provides an opportunity to reflect on the journey the lessons learned and the implications for R&D tax policy.

A bit of background

There were two separate pieces of legislation within the SME R&D scheme which formed the basis of the dispute.

• Subsidised expenditure: As SME relief was generous and targeted to a specific subset of UK businesses...