What is Research and Development Tax Relief?
Research and development tax relief are lucrative incentives by the UK government for the UK companies to encourage investment in research and development projects due to their significant contribution to the economy. The research and development tax relief scheme allows eligible companies to significantly reduce their corporation tax even for their failed R&D project. These schemes are very lenient in terms of their qualifying criteria. HMRC applies no limit on minimum qualifying expenditure, company size or domain and allows any company contributing to the advancement of science and technology to claim.
Qualifying Expenditure for R&D claims
HMRC provides a list of several qualifying costs involved in the R&D project against which you can make research and development tax relief claims. According to HMRC guidelines, these qualifying expenditures which can be included in the claim are:
- Cost of employees who are directly part of R&D projects.
- Externally provided workers
- Subcontracted R&D expenditure
- Cost of software used directly for R&D
- Expenditure of consumable items such as fuel, water, power etc.
- Prototypes
- Clinical trial expenditures
- Independent research
- Travel Expenses for R&D
While claiming research and development tax relief, many companies are unaware that they can claim for subcontracted part of R&D project and externally provided workers as well. And some people categorise them as one, which isn’t correct. This blog will explain how you can increase the value of your claim by including the cost of externally provided workers in your qualifying expenditure.
What Do Externally Provided Workers Mean?
The temporary workers provided by any third party such as a staffing agency are termed externally provided workers, also written as EPW. Where subcontractors are hired for work where you lack expertise and are paid to work autonomously, it’s different in the case of EPW. For externally provided workers, you pay third party organisation for the staff who works under your supervision and management. Third-party organisations that provide EPW might include connected companies, staffing agencies, or personal service companies.
Do Expenditure On Externally Provided Workers Qualify For the R&D Claims?
If you meet the following prerequisites, then your externally provided workers’ expenditure qualifies for the claim:
- The externally provided workers are either self-employed or provided by some third party, i.e. they are not your employees.
- The staff provided works under your management and active supervision.
- EPW must be an active part of research and development work.
- There must be a contractual agreement between the third-party provider and the staff.
Under BIS guidelines, as mentioned before, costs paid to the third party for the externally provided workers who directly contributed to the research and development project qualify for the research and development tax relief claim. The workers must have actively participated in the R&D, and the EPW costs must relate to the time of staff engagement in the eligible research and development activities.
EPW Costs and SME Scheme:
Under the SME scheme, you can inculcate 65% of the costs paid for EPW in your R&D claim. However, if a third party is connected, then rules differ; you can claim for the cost paid to the third party or the relevant expenditure of the staff provider in paying externally provided workers.
EPW Costs and RDEC Scheme:
HMEC allows companies claiming research and development tax relief via the RDEC scheme to include 65% externally provided worker’s expenditure in the R&D relief calculations.
How is EPW Expenditure Calculated?
Externally provided workers are treated as internal workers other than the claim’s limitation of a 65% cost exception. EPW expenditure is calculated by keeping the working hours workers invested in the research and development in view.
Let’s suppose your company paid £10,000 to the third-party provider for the developers who were directly working on research and development projects for 50% of their time, making 50% of their time eligible for the claim. So, in the calculation of eligible EPW costs, you divide the total costs paid for EPW by the eligible time, i.e. £5000 is the total EPW expenditure. As you are only allowed to claim 65% of the EPW expenditure, therefore in this case, qualifying R&D expenditure is £3250.
In this way, you can calculate your eligible EPW costs within a few steps.
Subcontracted R&D and Externally Provided Workers
For externally provided workers, involvement of the third-party provider is a must, whereas, in subcontracted R&D, you outsource part of your R&D project to another company to access expertise your company lacks. Research and development tax relief schemes treat both subcontracted R&D and EPW differently.
Eligibility criteria and conditions are not as simple to understand as it seems. Understanding all the HMRC guidelines and finding eligible costs in your business is quite a daunting task and requires experience to understand fully. Therefore our R&D tax credit specialists help firms throughout the claiming process, from finding hidden qualifying expenditures to submission of the claim to HMRC. We prepare fully compliant claims for your business with our experience and a complete understanding of legislation.
If you want to know more about the eligible expenditures and research and development tax relief claims, contact our skilled R&D tax relief experts. We are here to answer all your queries regarding the claiming prerequisites and guidelines. Our team of R&D experts have simplified the process of R&D claims so you can get your R&D incentives with a fast, hassle-free process. Contact us now.