So, you believe that you have a project that might qualify for research and development (R&D) tax relief. Is it worth your while to make a claim? What costs will qualify?

HMRC’s regulation defines 4 types of qualifying R&D cost:

  1. Direct Labour
  2. Subcontract work
  3. External staff – agency staff or group recharges
  4. Consumables – any item consumed within the project

The qualifying costs must be:

  • directly or indirectly related to solving the technical problem
  • consumed by the R&D project which solves the technical problem
  • deductible for tax purposes which rules out dividends which are paid out of after tax profits

This is what you are allowed to claim….

  • Staff Costs by staff member
    • This includes the gross salaries, employers NIC and pension costs for staff directly involved in R&D or supporting the R&D team
    • Staff costs can quickly mount up – make sure you keep a record of time spent by day/week or month detailing the time that staff members are spending on each R&D projects.
    • There are some excellent time tracking tools available that can help you with this:
    • The percentage of time that a staff member work on R&D projects compared to ‘business as usual’ activities becomes the multiplying factor for claiming staff software costs and R&D consumables.
    • New start ups and small businesses running R&D projects, might find the staff costs of their claim are limited by paying their directors a minimal basic salary plus dividends. It may be worth increasing the directors’ salary and paying the PAYE and NICs which are all tax deductible and therefore increase the costs that can be attributed to an R&D claim.
  • Software costs – per person involved in the R&D process
    • The cost of any generic software licences for software used in the R&D process.
    • This might include licences for Word, Excel or the costs of project management software of any staff member involved in the R&D Process
    • The proportion of the software that is used on the machine to run an R&D project is…. so say you work 50% of your time on an R&D project – you would include 50% of your Windows and project management costs but not the machine on which the software is hosted!!
  • Software costs – purchases dedicated to R&D process
    • The cost of any specific software licences for software specifically purchased for use in the R&D process. This includes costs of any software used to work on the R&D project and software that might go into the final product.
  • Hardware Purchases
    • Prototypes, write off’s and scrap etc – The cost of any hardware purchases specifically purchased for use in the R&D process. (These costs must not be depreciated.)
    • Staff PC costs or servers for a business used to generate a taxable trading income is not allowed, the cost of a dedicated R&D server is allowed.
  • Subcontractor Costs (65%)
    • The cost of the subcontractors employed for the coding and development of the software – if part of the R&D project development or testing is outsourced, these costs can be included
    • Under the rules laid down by HMRC, you can normally only claim 65% of the costs of a subcontractor although this can be higher if the subcontractor is connected or willing to supply information regarding the actual costs of completing the work.
    • Costs of consultancy offering R&D advice is not allowed.
  • Externally provided workers (65%)
    • If staff are hired through a third party to work on your R&D project – agency staff for example, then 65% of those costs can be reclaimed
    • If staff are employed by one group company and recharged to another working on an R&D project, then 100% of  these costs are allowed
  • R&D Consumables – Electricity etc
    • This includes the cost of anything consumed within the R&D process.
    • It will include utilities (light, heat, electricity and water), postage and stationery and general admin costs

What is not allowed in an R&D claim?

  • Rent for lab, office or factory space even if it is dedicated to an R&D project
  • Computer hardware, computers, printers, servers etc unless the machine itself is a prototype or test rig
  • Directors dividend – are not allowed as these are paid out of profits after tax
  • Staff benefits in kind – private health care or the costs of company cars for staff working on the R&D project are not allowed
  • Travel – staff travel costs in relation to R&D projects are not allowed
  • Data and telecommunications costs – not allowed
  • Production costs – any items that are produced to make products used as demonstrators or are sold to clients are not allowed.
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