Can You Claim R&D Tax Credits on Subcontractors?

Ireland’s R&D tax credit allows companies to recover up to 35% of their qualifying expenditure, making it one of the most valuable incentives available to innovative businesses. But if some of your R&D activity is carried out by external partners, the rules around what you can claim become more nuanced.

Chains of contractors and subcontractors can make an R&D tax credit claim more complicated, with caps on eligible costs and specific requirements you need to meet. Understanding the rules carefully is the only way to make sure you’re claiming every euro you’re entitled to.

What counts as subcontracted R&D?

Revenue’s position is that qualifying R&D activity must be carried out by your company. There are, however, two recognised exceptions:

• R&D carried out by a university or institute of higher education in the EU or the UK
• R&D carried out by an unconnected third party

Connected parties cannot be included in an R&D tax credit claim. This means any company within your group, or any person (including a company) who can exercise control over your company, isn’t an eligible subcontractor for R&D tax relief.

Your subcontractor should be carrying out R&D on behalf of your company, under a formal agreement, with their costs settled in the accounting period you’re claiming for. As with all qualifying R&D activity, the work must be carried out in Ireland, the UK, or the European Economic Area (EEA).

Worth noting: the outsourced work doesn’t necessarily need to constitute R&D for the subcontractor themselves. For example:

A pharmaceuticals company developing a new drug formula subcontracts a testing facility to carry out shelf stability tests. Those tests are routine for the facility, but they form part of the R&D project for the pharma company.

Similarly, a manufacturer developing a novel packaging material might commission standard tensile strength testing from a third-party laboratory. The testing is straightforward work for the lab; for the manufacturer, it’s generating new knowledge.

How much subcontracted work can you claim?

There are caps on the amount of subcontracted activity you can claim. These limits are linked to your own R&D spend, which prevents claims from companies set up purely to run subcontractor costs.

For both university payments and third-party contractor payments, relief is restricted to the greater of:

• 15% of your own qualifying R&D expenditure, or
• €100,000 (provided your own qualifying spend is at least as much as the outsourced costs you’re claiming)

Budget 2027 announces an increase in both limits to the higher of 20% or €200,000, as set out below. Until Finance Bill 2027 is enacted, the 15% and €100,000 figures apply.

These two limits for third parties and for universities are calculated separately. However, if you work with multiple third-party subcontractors in the same period, the cap applies to the total of those costs, not per contractor. You can’t claim €150,000 for each subcontractor; the limit covers all third-party payments combined.

For example:

A company with €1,000,000 in expenditure can claim €150,000 for university payments (15% of its expenditure) and €150,000 for third party payments. However, if it contracts multiple third parties in that period, it can still only claim up to €150,000 of the total of those costs, not €150,000 per subcontractor.

The €100,000 floor matters for smaller companies. If your own qualifying expenditure is €400,000, the 15% limit would give you €60,000. But because €100,000 is the greater figure, that becomes your cap, provided you’ve actually spent at least €100,000 in-house.

Do you need to notify your subcontractors?

Yes. To prevent “double-dipping”, where both your company and the subcontractor claim for the same activity, Revenue requires you to notify the subcontractor in writing that they may not claim the R&D tax credit for that work. This notification should be made before or on the date you make the payment.

There’s an exception: where the subcontractor couldn’t make a claim themselves, for example if they’re an individual, or a non-resident third party without a branch in the State, Revenue accepts that notification isn’t required.

Keep a copy of every notification you send. If Revenue queries the claim in an audit, you’ll need to show that this step was completed.

What about agency staff and individual consultants?

Agency staff are generally treated as outsourced costs and are subject to the same 15% cap as third-party contractors. If you’re using recruitment agencies to bring in personnel for an R&D project, those costs count against your subcontracting limit.

There is, however, an exception for individual consultants brought in directly. If all four of the following conditions are met, their costs can be treated as staff costs rather than outsourced R&D, and therefore fall outside the cap:

• The individual works under your company’s control and direction
• The individual works on your premises
• The individual contributes specialist knowledge that your in-house team doesn’t have
• The engagement period doesn’t exceed 6 months

The practical effect is significant. An individual consultant who meets these criteria can have their R&D costs claimed in full (subject to appropriate apportionment), rather than being counted towards your 15% subcontracting limit. If you’re close to that limit, it’s worth reviewing whether any individuals you’ve engaged could qualify under this exception.

Getting your subcontracting claim right

When R&D involves external partners, documentation becomes more important. Revenue expects you to be able to demonstrate that the outsourced work was qualifying activity carried out on your behalf. At a minimum, you should retain:

• Copies of contracts or task assignments setting out the scope of work
• Invoices for the amounts paid
• A brief description of the qualifying R&D activities carried out
• Copies of the notifications issued to subcontractors

If you’re pushing up against the 15% limit, you should also be able to show how you’ve calculated both your own qualifying spend and the subcontracted costs.

How are the subcontracting rules changing?

Budget 2027 raises both subcontracting limits, for work outsourced to third-level institutions and to unconnected third parties, from the higher of 15% or €100,000 to the higher of 20% or €200,000. It recognises the importance of collaboration between businesses and third-level institutions, and of giving you access to external resources that support your in-house work.

The two limits are still calculated separately, so you can claim under both without one reducing the other. Here is how the current and announced caps compare for each category, if you spend at least the full cap on outsourced R&D:

The €200,000 floor makes the biggest difference at lower levels of in-house spend, and the 20% figure takes over once your in-house R&D passes €1,000,000. There’s no change to the in-house requirement, so you’ll still need qualifying R&D of your own, at least equal in value to the outsourced work. These are announcements until Finance Bill 2027 is enacted, and the start dates will be set out there, so current rules apply to everything you’re preparing today. Our Budget 2027 guide covers the other announced changes.

Key takeaways

• Subcontracted R&D can be claimed, but only through universities or institutes of higher education in the EEA or UK, or unconnected third parties. Connected group companies don’t qualify.
• The cap is the greater of 15% of your own qualifying spend or €100,000. University and third-party limits are calculated separately.
• The limits are set to rise. Budget 2027 announces an increase to the higher of 20% or €200,000 for both third-party and university costs, subject to Finance Bill 2027.
• You must notify subcontractors in writing that they may not claim the R&D credit for the same activity, before or on the date of payment.
• Individual consultants may qualify as staff costs if they work under your direction, on your premises, for no more than 6 months, avoiding the subcontracting cap entirely.

The rules around subcontracted R&D are more nuanced than they first appear, and the interaction between the cap, the €100,000 floor, and the staff cost exception means the right answer depends heavily on your specific commercial arrangements.

If you’re unsure whether your subcontracting arrangements qualify, or want to make sure your claim is structured correctly, contact Myriad to discuss your situation.