Insight to R&D eligible cost

What costs qualify for R&D tax credits?

You can claim Research and Development (R&D) tax credits on revenue expenditure, i.e., day-to-day operational costs. But usually, capital expenditure (money spent on fixed assets such as land and buildings) is not eligible for R&D Expenditure within the claim.

Eligible R&D Expenditure

Revenue expenditure includes the following costs, which can be included in your R&D claim:

Staffing costs

For SMEs and large companies, the category can include:

  • Gross salaries (including wage, overtime pay and cash bonuses)
  • Employer NI contributions
  • Employer pension contributions
  • Certain reimbursed business expenses

Any benefits in kind, such as private medical cover and company cars, are specifically excluded from the staff costs category. You cannot include director dividends. And this can affect the value of your claim quite substantially if your directors spend time at work on the R&D activities.

Some employees or directors may be wholly engaged in R&D activities. However, it’s more common for staff to be partially involved in R&D. you should therefore determine the appropriate apportionment to their total staffing costs to include in your R&D claim.

Subcontracted R&D

The costs that you can include for subcontractors also differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme. If you make an RDEC claim, money spent on subcontractors does not usually qualify for tax relief, but some exceptions are explained below. If you make an SME claim, you can include 65% of payments made to unconnected parties.

SME R&D tax credits and subcontracted R&D

If you are an SME, you can include expenditure on subcontractors involved in R&D projects in your R&D tax credit claim. For ‘unconnected’ subcontractors, payments linked to R&D activities are restricted to 65% for the claim. For ‘connected’ subcontractors, the rules are more complex and based on the nature of the subcontractor’s expenditure.

R&D Expenditure Credits (RDEC)

Through the RDEC scheme, companies can only claim for expenditure on subcontracted R&D if the subcontractor is:

  • An individual
  • A partnership, where all partners are individual
  • A qualifying body (including charities, universities, and scientific research organisations).

The expenditure does not need to be restricted to 65% in the same way as SME claims.

Externally Provided Workers (EPWs)

Staff costs are paid to an external agency for workers engaged in the R&D project. Relief is restricted to 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected.

Consumable

The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.

Software

You may claim the cost of software directly employed in the R&D activity. Where software is only partly employed in direct R&D, an appropriate apportionment should be made.

It can be complicated to submit an R&D tax credit claim to HMRC’s exacting standards. Get in touch with our Tax Team at WIM accountants for guidance for your R&D claims on info@wimaccountants.com or call our offices on 02082271700

Originally posted 2022-02-17 15:00:21.