R and D Tax Credit are significant funding for the UK businesses, which aims to motivate companies to invest in the advancement of science and technology. R&D incentives are very generous and available for companies of all sizes regardless of their financial position, i.e. both profit and loss-making companies can claim R and D tax credit against their qualifying R&D costs. However, to produce maximised claim, it is essential to be fully aware of what can you claim for. HMRC provides clear categories of qualifying costs. This blog will help you determine which expenses qualify for the R&D claim.
Eligible Costs for R and D Tax Credit Claim Are:
1. Employee Salaries
HMRC allows you to include the wages of your staff who are directly involved in the R&D project in the R and D tax credit claim. Qualifying employees’ costs include pensions, gross employee wages, national insurance contributions, few reimbursed expenses and travel expenses for R&D project purposes. The employee cost must be paid under the accounting period before submitting the claim.
Note: You cannot claim for self-employed contractor’s expenditure.
2. Subcontracted R&D projects
Subcontracted R&D is when you outsource part of your R&D project to another company. If you claim R and D tax credit via SME scheme, you can claim 65% of subcontractor’s costs for subcontracted R&D activities. However, the subcontractor’s costs are not restricted to 65%. It varies between connected and unconnected subcontractors.
For large companies claiming via RDEC scheme, subcontractor’s costs usually do not qualify for the claim. In the RDEC scheme, only a limited range of subcontracted costs might be eligible such as an individual subcontractor, charities, scientific research organisations etc.
3. Software Costs
You can include expenditure made to buy any software required for the R&D project in the R and D tax credit claim. You can claim the total cost of the software created or purchased for R&D purposes. If the software is only partly used for R&D, its price should be apportioned according to the use.
4. Expenditure on Consumables/Utilities
Consumables inculcate all the material utilised to carry out the R&D project. It also includes resources like water, heat, light, etc. You can claim for all the utilities and materials directly used in the R&D activities. You can also claim for the material used in creating prototypes and testing as they are part of qualifying R&D activities.
Note: Cost of rents, data, test facilities and other indirect costs cannot be claimed as consumable or utility costs.
5. Prototypes Expenditure
As a creation of prototypes intends to resolve scientific and technological uncertainty, it is qualifying R&D activity. Therefore qualifying expenditure also include costs of designing and creation of prototypes.
Note: Prototypes created for commercial purposes do not qualify for the claim.
6. Clinical Trial costs
Qualifying R&D expenditure includes costs of clinical trials done in the pharmaceutical industry and payments made to the volunteers for clinical tests related to R&D. Trial costs can usually be claimed only by pharmaceutical firms carrying out research and development projects.
7. Externally Provided Worker Expenditure
Externally provided workers are those individuals who have a direct contract with any staff provider agency. EPW are like regular staff, but they are externally offered by any agency. According to HMRC, you can claim R and D tax credit for the costs paid to the agency for the staff taking part in R&D activities. You can include 65% of EPW costs in R and D tax credit claims like subcontractor’s cost.
8. Indirect Staff Costs
Indirect staff included employees involved in supporting R&D activities like report typing, maintenance, training and administration. HMRC allows you to include wages of the indirect staff who has a part in the R&D project.
What costs do not qualify for the R and D credit claim?
It is equally important to know which costs are ineligible for the claim. Following are the expenses which HMRC has listed as ineligible for R and D credit claims:
- Production and distribution of goods
- Capital expenditure
- Land costs
- Costs of trademark