What expenses qualify for R&D tax credit?

As discussed previously, the sort of claims that typically make up R&D tax credit claims are dictated by HMRC. These include ‘creative and systematic work undertaken in order to increase the stock of knowledge’. Going a step further and identifying the expenses within each project is very important. This is because it will help determine the eligibility of your business, as well as how much you can claim on a project.

Furthermore, applying for R&D tax credit using expenses which won’t qualify is wasted effort. This is why we’re here to tell you which costs will qualify for R&D tax credit.

The qualification process

Whether you qualify for R&D tax credit or not is also the decision of HMRC. Regardless of the sector or field, any business contributing to innovation can qualify for R&D tax credits. HMRC requires a detailed application for R&D tax credit, featuring a report of the work that has occurred. The first step in this application is identifying the projects your client wishes to claim.

It’s therefore important to identify the eligibility of the projects you’re planning to claim. This goes hand -n-hand with a focus on the costs within those projects.

If you’re curious about the general eligibility of your business, we’ll be covering this topic in depth in our next blog post. In the meantime, you can learn more about the claims process here.

Common business expenses that qualify for R&D tax credit

R&D tax credit claims are primarily made up by the day-to-day operational costs of the business. This is because some of the regular business assets are always set aside for R&D projects. The following revenue expenditure will likely be present in all R&D projects that companies undertake:

  • Staff costs: Any salaries of staff involved with the R&D project are claimable. These costs can include employer pension fund contributions, bonuses and Class 1 National Insurance contributions. *Reimbursed costs also count so long as they are paid by staff first. Travel costs are a great example for this, although they must be in relation to the qualifying R&D activities.
  • Consumables: This concerns items that get used up during the R&D process, such as physical materials and hardware. Also included are utilities like power, water and fuel. This will only apply if they get used directly in R&D. HMRC provides guidance on calculating what proportion of consumables are used in R&D projects.
  • Software: The cost of any software used in the R&D project can be claimed. It can be the same software used by the business day-to-day, so long as an appropriate proportion of the cost gets included.
  • Prototypes: Creating a prototype is a great way to qualify for R&D tax credit in the first place. The cost of developing a prototype can therefore be claimed, including creating and designing it.

More expenses

The list goes on!

  • Externally provided workers: Costs paid to third party workers involved in the project, i.e. not on your payroll. Common examples include Staffing Agencies and Personal Service Companies. In most cases a claim of up to 65% can be made for payments made to an external staff provider.
  • Subcontractors: These are usually experts in their field hired directly to provide services relating to the R&D project. They are usually paid directly through invoices due to their autonomous nature. Again, 65% of payments in this area can be claimed. On the other hand, if the subcontractor belongs to a connected party (parent company or subsidiary) then you can qualify for 100% of the expenditure.
  • Research contributions: Payments made to third party organisations for research purposes can be claimed as a R&D tax credit expense The research conducted must be relevant to the broad field or scientific pursuit of the business. Examples of qualifying groups are scientific research groups and charities. While the organisations usually need to be UK based, HMRC specifies some overseas bodies which qualify. Unfortunately research contributions are reserved for larger companies.
  • Clinical trial volunteer costs: Clinical trials are a huge part of pharmaceutical R&D. These costs are not covered by the other categories discussed previously though. Your client may be able to claim for costs associated with attracting volunteers, as well as paying for them. HMRC has guidelines relating to claiming these costs.

Common mistakes to watch out for

Most of the time, capital expenditure will not be eligible within R&D tax credit claims. This includes expenses on fixed assets such as land and buildings.

Additionally, many of the costs mentioned above have caveats to look out for. Most of these concern ensuring that the costs are directly involved in the R&D project. Ultimately, this will determine the eligibility of the claim itself.

A prototype must be designed to resolve a scientific or technical uncertainty to qualify as an R&D tax credit expense A prototype intended for commercial purposes will not qualify. Even a prototype which involves R&D in its development will not qualify if it is later sold to a customer. The cost of the whole build will be lost. HMRC takes the stance that there is no longer any technological uncertainty if a company is willing to sell to a customer.

Still unsure? made.simplr can check the eligibility of your costs for you

Calculating the eligibility of all your clients’ project costs is time consuming and complicated. That’s why our experts are available to do the heavy lifting for your client. Most importantly, they will ensure each of their projects’ costs are covered within their R&D tax credit claims. This is so the benefit to your client’s business is maximised to its fullest.

Our software simplifies the application process to make inputting project costs as painless as possible. We guarantee a service that will save you and your client time, whilst also ensuring your R&D tax credit claim doesn’t spare any expense.

Don’t hesitate in contacting us today for a demo.

content team

Our Content Team is the R&D specialised, curious and thorough group behind made.simplr's blog and R&D resources, covering topics of interest to the R&D, accounting and innovation world.

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