Date Published:
March 14, 2023
Here we look at the various costs that can qualify for Research and Development Tax.
In both the SME and RDEC schemes there is some guidance on what costs can and cannot be included in a potential R&D Tax claim.
Any claim for R&D tax relief must relate to costs incurred within two years of your next company year end date. Claims can be made for each year a project is under way and the project need not have been profitable or successful.
It may be that some part of a project involves R&D but not others. Costs relating to the elements of the project that do not resolve a scientific or technological uncertainty cannot be claimed for. An example of this would be work spent on the design or appearance of a product. While this may involve innovation it does not resolve an uncertainty and does not contribute new knowledge to a business sector.
More general business costs such as travel expenses and mobile and Wi-Fi charges are not claimable.
HMRC does not have specific record-keeping requirements for R&D work so companies must find their own balance between recording sufficient detail to maximise claim value and not diverting staff time to unnecessary record keeping.
Key to this is contemporaneous record keeping, which in addition to helping to ensure claimable work does not go unnoticed will speed up the process of putting together the claim.
You can claim for the cost of using your staff's time on an R&D project.
This includes their salary and employer’s national insurance and pension contributions.
The claim should relate to the proportion of staff time spent on R&D.
It does not include costs such as a company car and private medical insurance or other benefits in kind.
Some reimbursed business expenses may qualify.
Accurate records are essential for a claim for staff time and ideally the R&D work the staff are undertaking should be identified as soon as possible so a detailed and contemporaneous record of time spent and costs incurred can be kept.
Without such information it may not be possible to claim successfully for staff engaged in R&D work. It is sensible to devise an apportionment methodology to back up claims.
Managers may only become aware belatedly that staff were engaged in R&D work for which a claim for tax relief can be made. In the case of first-time claimants who are able to identify the start and end dates of an R&D project and estimate the time employees spent on the project, HMRC is likely to accept the claim if it is reasonable.
Dividends paid to directors engaged in R&D may not be included in claims.
For SMEs, up to 65% of subcontractor and agency staff costs relating to contracted R&D work can be claimed. A claim can only be for the R&D part of the work undertaken by the subcontractor.
This applies when the subcontractor is unconnected, that is, a separate entity from the directing company. Where the subcontractor is a connected contractor – one that is controlled by the same person or group as the company directing the R&D – the claim must be for whichever figure is lowest: the R&D payment to the subcontractor or the subcontractor’s expenditure on the R&D work.
A large company can claim 100% of its R&D subcontractor costs but only if the payments are made to an individual, a partnership of individuals or a charity, higher education institute, scientific research institute or health service body.
Costs relating to agency staff (sometimes known as externally provided workers or EPWs) supplied by unconnected companies can be claimed for. These workers may not be directly employed and must work under your control and direction. Only the R&D-related parts of their work can be claimed for and only 65% of the agency’s fee can be claimed; the remaining 35% is intended to account for the provider’s profit margin.
Where agency staff are provided by a connected company the 65% limit does not apply. The claim should be for whichever figure is lower: the payment to the provider for the worker or the actual cost of the work to the provider.
Both SMEs and large companies can claim for EPWs.
An EPW is not a subcontractor. For someone to be an EPW there must be a staff provider, as well as the worker and the company. This distinction is important for large companies using the RDEC scheme because of the tight rules limiting the types of subcontractors that it can claim for.
Detailing the claim for a subcontractor’s R&D work is not straightforward and there are some key considerations to bear in mind.
The relationship between company and subcontractor should be one in which the company bears the risks and the subcontractor is paid whether or not the project succeeds and would not normally bear the expense of unforeseen costs.
The contracted-out work would be to a detailed specification and the controlling company would be expected to have a good understanding of what was involved in that R&D activity.
Where the subcontractor is simply carrying out set tasks under close supervision and has little autonomy in performing them, HMRC might regard the relationship as being with an EPW despite an employment agency or similar not necessarily being involved. A true subcontractor would be expected to exercise autonomy in resolving any difficulties that arose in the development work itself.
Intellectual property relating to subcontracted work would be expected to be held by the directing company.
Materials that are consumed during the R&D process can be claimed for.
It is also possible to claim for part of light and heating costs and water rates.
Likewise materials used for making prototypes or for staging trials are eligible.
Consumables costs relating to the whole product or process may not be claimed for.
Costs incurred on materials after the technical and scientific uncertainties have been resolved cannot be claimed for even if the project is still under way.
The cost of software used in R&D can be claimed for and if software used for R&D is also used for non-R&D activities an apportionment methodology should be devised.
For companies new to R&D as well as those that may not be maximising the value of their R&D tax relief claim expert advice is essential.
Areas such as apportionment methodologies and assessing what business expenses are claimable are complicated, as is making a robust case that work undertaken is R&D work.
If you want to ensure you have every cost you are entitled to then don't hesitate to get in touch for professional advice.
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