Businesses operating through more than one company face a layer of additional complexity when it comes to R&D tax relief. The fundamental question of whether the work qualifies is the same as for any other business. But questions about which entity claims, how costs are allocated, and how connected companies affect each other require a group-level view rather than a company-by-company one.
The rule changes from April 2024 have made some of this more straightforward in certain areas, and more restrictive in others. This guide covers what group finance leaders need to be aware of.
Which company in the group can claim?
This is the first question to get right. Under the current rules, the answer depends on the factual and contractual position: who engaged whom, what the contract required, and whether it was reasonable to assume that R&D of that sort was intended by the customer. In group structures, the company carrying out the work is not always the company entitled to claim, so the position needs to be reviewed entity by entity rather than assumed from the operating model.
Where one group company commissions development work from another connected group company, specific connected-party rules apply. In some cases the customer company is treated as the claimant; in others, the group may consider whether a statutory joint election is appropriate. This is an area where the detail matters, and the claim position should be mapped carefully before returns are filed to avoid the wrong entity claiming or the same activity being reflected twice.
Getting this wrong, for example both entities claiming, or the wrong entity claiming at the wrong amount, creates a compliance risk. It is worth mapping this clearly before claims are filed, particularly if the group structure has changed or if development work is shared across entities.
Moving the relief around the group
Where R&D credit amounts are managed within a group, the wider tax treatment of any related intra-group arrangements needs to be considered carefully. This is an area where the legislative detail matters and the answer will depend on the structure adopted, so groups should not assume that internal settlement mechanics are automatically tax-neutral without specific review.
Overseas development costs
For periods beginning on or after 1 April 2024, overseas subcontractor and externally provided worker costs are generally excluded from relief, subject to limited exceptions. For groups with international operations or offshore development teams, this is often one of the most material changes in recalculating qualifying expenditure under the current rules resulting in reduced eligible claim expenditure.
How connected companies affect eligibility
Connected companies can affect both eligibility and the value of relief, but the analysis is not limited to a simple company-by-company review. Group relationships may be relevant when assessing SME status, and they are also relevant when considering whether a loss-making company meets the conditions for enhanced R&D-intensive SME relief. A subsidiary that appears to qualify on a standalone view may not do so once the wider group position is taken into account, so these tests should be worked through before the claim is prepared.
Grant funding and subsidised projects
The treatment of grant-funded and subsidised projects has changed materially under the post-1 April 2024 rules. Projects that may previously have produced limited value under the former SME regime may now merit review, but grant funding should not be treated as irrelevant. The interaction between the funding arrangement, the project facts and the current scheme rules still needs to be considered carefully, however projects previously set aside as uneconomic to claim may now be worth including.
Notification and filing across multiple entities
Any company that is within the claim notification rules, first-time claimants and companies returning to claims after a gap, needs to consider the six-month post-year-end deadline separately. In a group with multiple potential claimants, this needs to be tracked entity by entity. Missing the relevant deadline for one company can prevent that company from claiming for the period.
Each claiming entity also needs to submit its own additional information form alongside the claim. Where multiple group companies are claiming on related activity, maintaining consistency in how the qualifying work is described across those forms reduces the risk of HMRC querying inconsistencies.
The advance assurance pilot
HMRC is launching a pilot that allows businesses to seek upfront confirmation that their proposed claim approach is acceptable before submitting. For groups with complex structures, shared development activity, or first-time claims on behalf of multiple entities, this may be worth engaging with once the pilot is open. It will not cover everything, but it offers a route to reduce uncertainty on the most complex elements of a claim.
What to focus on now
- Map where qualifying activity is actually taking place across the group and confirm which entity is best placed to claim under the current rules.
- Review any historic approach involving overseas resource and recalculate qualifying expenditure under the post-1 April 2024 rules.
- Review any claims with intra-group transfers (recharges, settlements or credit-sharing arrangements) to confirm that the tax analysis remains supportable.
- Revisit any grant-funded projects that were previously not claimed because of the subsidy restriction.
- Check size thresholds at group level for any entity considering an enhanced relief claim.
- Track notification deadlines for every entity that intends to claim for the current period.
We take a group-level view when advising on R&D relief for clients with connected structures. If you would like to review your current approach in light of the April 2024 changes, or if there are entities within the group that have not previously claimed but may now qualify, speak to a dedicated Client Finance Partner.
