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Knowing exactly where and how much you spend on your Research and Development (‘R&D) activities is one of the most crucial things to consider when claiming R&D tax incentives. These are referred to as “qualifying costs.”
Your project’s activity must be seeking to achieve an advance in science or technology to qualify for the increased R&D tax relief. Only certain types of expenditure are eligible. And, in some instances, an allocation of the qualifying costs is necessary.
The following are some of the several types of qualifying expenses.
Salaries and expenses of staff
One of the categories, where a significant amount of money is spent is employee remuneration. The employer’s national insurance contributions and gross salaries, including wages, bonuses, and pension contributions, are included in these expenditures. The time spent, either directly or indirectly, supporting the R&D activities will determine the level of staff remuneration included in your claim.
Benefits in kind, such as private medical insurance and company cars, together with shareholders dividends, are expressly excluded from the area of employee expenditures.
HMRC accept that records of time spent on qualifying R&D projects are not always available and as such a reasonable methodology must be applied when assessing the staff costs to be included in the claim. It is imperative that the assessments are made by competent professionals as they are expected to have a good oversight of activities occurring in respect of the eligible projects.
Externally Provided Workers
Individuals hired from a third-party staff provider are known as externally provided workers (EPWs). They are not subcontractors or employees. The individuals must contribute, directly or indirectly, towards the R&D projects in order to be included in the R&D claim. These individuals must work under the direction, supervision and control of employees of the claimant company.
R&D relief is limited to 65% of the eligible payments paid to the staff provider for unconnected EPWs. If the staff provider and the claimant company are connected, additional relief may apply.
Subcontracted R&D work occurs when you contract with a third-party to perform activities contributing to your R&D project on your behalf.
As a general guideline, you should allocate subcontractor invoices in respect of R&D work and claim just 65% of payments made to unconnected subcontractors under the SME regime.
If the subcontractor is connected to the claimant company, the expense may be eligible to be claimed in full.
Subcontractor costs are not eligible under the Research and Development Expenditure Credit (‘RDEC’) regime unless they are made to an individual or an eligible body. The rules around subcontracted work can be complex and advice should be sought from an R&D adviser.
You can claim R&D relief in respect of costs relating to items consumed or transformed as part of your R&D project. This eligible cost category covers materials together with an apportionment of water, fuel, and electricity.
Consumable expenses are only eligible until the point your technological uncertainties are addressed, and generally cannot be claimed if they form part of the finished product
You can claim R&D relief in respect of software and software licences if these are required to perform the R&D activity. If you utilise the same software or software licence for general business activities, you should include a reasonable apportionment of the cost in your claim. This software licence might be as essential as Microsoft Office. custom-made for R&D projects.
The expense of developing and building a prototype is frequently mentioned in respect of R&D activities. To be eligible for relief, the prototype’s main aim must be to settle some form of doubt.
If you create a prototype for a commercial purpose and this is later sold, the cost of materials cannot be included within the claim.
Clinical trial volunteer costs
Typically, this expense category is only seen in the pharmaceutical business. As part of an R&D initiative, firms pay people to test the efficacy of pharmaceuticals.
Businesses can claim relief in respect of the expenses of obtaining volunteers and the cost of paying for them.
Contributions to Independent Research
Payments to eligible third parties that conduct research on your behalf can be claimable under contributions to independent research.
This eligible cost category only applies to claimants under the RDEC regime.
The study must be relevant to the field in order to be claimed and the research must be conducted by individuals or a qualified body, these include designated scientific research entities and higher education institutes.
Capitalised Revenue Expenditure
In some circumstances, you may be able to claim capitalised expenses.
This is only eligible where the expenditure relates to intangible fixed assets which could be deemed revenue in nature. To claim full relief in the year of expenditure, advice should be sought from an R&D adviser.
Research and Development Allowances
Research and Development Allowances (‘RDAs’) can accelerate relief in respect of capital equipment utilised as a part of an R&D project as these assets can be categorised in a separate cost category. This provides relief for 100% of the capital expenditure in the period of acquisition, which could otherwise be eligible for restricted Capital Allowances over a more extended period.