The test
Decided and intended it, not just paid for it
For accounting periods beginning on or after 1 April 2024, R&D is treated as contracted out where one company (the customer) enters a contract with another (the contractor), the contractor's work under that contract includes R&D, and it's reasonable to assume the customer intended or contemplated that R&D of that kind would be needed (CTA09/S1133(2), summarised in HMRC manual CIRD161000). Where that test is met, the customer is generally the one entitled to claim, on the policy logic that the party making the decision to undertake R&D should get the relief for it, because that's what actually incentivises more R&D being commissioned in the first place.
The exception
If the contractor did more than the customer asked for
"Intended or contemplated" is read narrowly: HMRC's own guidance is that awareness the contractor might do some R&D isn't enough on its own; the customer needs to have specified, in substance, the nature of the technological advance and uncertainty being addressed. If a contractor genuinely goes further than what was contracted for (solving a technical problem the customer never asked about or specified), the contractor can claim for that R&D itself, because the customer didn't intend or contemplate it.
Where this plays out in practice: a manufacturer that commissions an engineering firm to solve a named, specific technical problem (described in the contract or the brief behind it) is very likely the party who can claim, even though the engineering firm did the actual work. A supplier that stumbles onto a genuine technical advance while fulfilling a routine, non-technical order for a client who never asked for or specified anything of the sort is a different situation, and the supplier's own claim is the stronger one. The test runs on what was actually specified and intended, not on who signed the purchase order.
The closest thing to case law on this
No tribunal has ruled on the new test yet, but a related question keeps going the same way
The current contracted-out test above is new from April 2024, so no tribunal has ruled on it directly yet. But the closely related question under the old SME scheme (whether R&D is "subsidised" or "contracted out" just because a client eventually pays for the finished work) has been tested repeatedly, and HMRC has lost every time. Quinn (London) Ltd in 2021, then Collins Construction and Stage One Creative Services (both 2024), all held that a company doing its own R&D to fulfil a client's brief doesn't lose that R&D just because the client is the one who ends up paying for it. See the tribunal case tracker for the full detail on each case. It's old-scheme authority, not a direct ruling on the new test, but the underlying logic points the same way.
What actually changed for large companies
The old RDEC rules often blocked this claim outright
Before the reform, large companies claiming through the old RDEC scheme generally couldn't claim for R&D they'd contracted out to another company at all, because RDEC was built around a company's own directly-incurred R&D. The merged scheme changes that: gov.uk's own description of the reform is that it "adopts an approach to contracted out R&D which allows more large companies to claim for the costs of the work contracted out" (see gov.uk, the merged scheme), alongside removing the old rules about which contractors counted as "qualifying bodies". A large company that commissions genuine R&D from a UK contractor and previously assumed that spend simply didn't qualify is worth revisiting under the current rules.
Decision helper
If your accounting period spans the change
Transitional rules stop the same R&D being claimed twice, or falling into a gap
These rules matter where a contract runs across the old rules and the new ones (HMRC manual CIRD165000). The general priority is that whichever company would have been entitled under the old rules keeps that entitlement for the transitional period, with specific exceptions where the old rules and new "contracted out" definitions don't line up cleanly. This is genuinely fiddly. If your accounting period straddles 1 April 2024 and a contracted-out relationship is involved, treat it as a question for an adviser rather than something to self-assess from a summary.
Alternatives and limitations
This page covers who's entitled to claim. It doesn't cover whether the underlying work qualifies as R&D at all; R&D claim services covers that. If some of the contracted-out work happened overseas, a separate restriction applies on top of this one (see overseas R&D costs after April 2024). And if you're not sure which scheme your accounting period falls under in the first place, start with the scheme checker.
