For a business to successfully claim R&D tax relief benefits, it needs to understand what are the qualifying costs. HMRC has a specific guideline of the type of costs that are eligible and not eligible for the R&D tax credit.
Depending on whether a company is loss-making or profitable, a small or medium-sized enterprise (SME) can receive between 14.5% and 33% of its R&D cost back as cash or tax credit. Overall, direct and externally provided staff, subcontracted R&D, consumables, energy costs, software, trials, prototyping and independent research may all qualify for R&D tax relief. Costs that are not eligible are production and distribution of goods and services, marketing, payments for the use and creation of patents/trademarks, cost of land and hosting, as well as capital expenditure.
It is important to keep in mind that there are some exceptions to each of the categories. For example, although capital expenditure is generally not eligible, the cost of acquiring capital equipment may benefit from a separate category under Capital Allowances. Therefore, if you are unsure of what to include in your R&D tax credit application, it is best to speak to an R&D tax credit specialist.
Eligible R&D expenditure
- Direct R&D staff costs
- Subcontracted R&D
- Externally provided R&D staff
- Consumable items
- Software directly used in the R&D activity
- Clinical trial volunteers
Scroll to learn more about the eligible costs.
Some helpful links:
For staff that are directly and actively engaged in the R&D project, the claim can include employees salaries, wages, class 1 NIC and pension fund contributions. If the staff is only working partially on the project, then appropriate allocations will be needed, in which the number of hours dedicated to the R&D project carefully tracked. Redundancy payments cannot be claimed as a staff cost.
Subcontractor R&D has different rules depending on whether the company is an SME or a Large Company. Generally, you cannot claim R&D expenditure subcontracted to other persons as a Large Company but as an SME you can claim up to 65% of the payments made to the staff provider.
Externally Provided R&D Staff
EPWs are temporary workers sourced from an external agency that is directly and actively engaged in the R&D project. These people are not employees or subcontractors. Businesses can claim up to 65% of the costs paid out to the external agency for the EPWs services. Special rules apply if the company and staff provider are connected or elected to be connected, click here to learn more. If the EPWs carry out both R&D and non-R&D work, appropriate apportionment should be applied.
A business can claim for the cost of items that are directly employed and/or consumed during qualifying R&D activity. This includes materials and a proportion of water, fuel and power consumed during the R&D process. The type of consumables that qualify as a cost for R&D tax relief tends to be different in each sector. For example, this could include materials used for modelling or prototypes, where there is generally no intention to sell.
Consumable items employed indirectly are not qualifying expenditure. For example, the power used in the training facility would be included to the extent that the facility was providing training directly to support the R&D activity. If the facility provides power to be used both for R&D and other activities, then it would either need to be separately metered or a suitable apportionment would need to be calculated. Any material that is consumed or transformed in the process of R&D activity can be claimed, but not those that will make up the finished or saleable product. At the moment, you cannot claim costs for rent, telecoms or data storage.
Business can claim the cost of software that is directly used for the R&D activity, if the software is only used partially for R&D, then appropriate apportionment should be made. It can be as simple as Microsoft Office or could be specialist software specific for the R&D activity. For example, software used by the HR department for routine work relating to the R&D staff can be included, however, software used to train HR would not be included.
Clinical Trial Volunteers
Pharmaceutical companies and research organisations often make payments to volunteers taking part in clinical trials. These are usually eligible costs for the R&D tax credit.