R&D tax credit guidance: What expenditure qualifies in my claim?

The research and development tax credit is a great way for start-ups to receive funding for their R&D costs. If your claim qualifies, you will be able to get back almost one-third of your total spend.  

But it can be confusing completing your claim. That’s why we’ve put together this post to give you R&D tax credit guidance on what expenditure qualifies for a claim.  

Anne Rose, Head of Tax at Burgis & Bullock, runs through who qualifies and what expenditure can be included in a claim for R&D tax credit in this blog.

What is R&D tax credit?

The research and development tax credit was put in place by the UK government as an incentive for companies to undertake activities that will help them innovate and grow.  

Unlike other business expenses, such as marketing or office space rental, R&D costs can be used to generate a cash payment from HMRC.

The scheme rewards innovative behaviour and companies that are seeking to develop new products, processes and technologies.  

There are two schemes, the SME scheme and the Large company scheme, with the SME scheme being the most generous.  

Who qualifies for R&D tax credit?

To qualify for R&D tax credit the business first of all has to be a company, it cannot be a sole trader or a partnership. Any company that is doing innovative work has a right to claim for this tax relief.  

You can only start to claim when you have incurred qualifying costs!  

Here are the three main qualifying criteria you need to hit:  

  1. Must be performing qualifying research and development activities
  2. Qualifying research is defined as an activity that has the potential to contribute to increasing industry knowledge about a technological advance.
  3. This includes any process involving experimentation, exploration, creation or invention where there is no certainty whether any results will be achieved

One particular aspect that can cause difficulty is that you can only include expenditure which is incurred after when HMRC would agree you have started an R&D project and before it finishes by HMRC guidelines.

Businesses often want to include everything from the minute they have a first thought about something, but HMRC will say you can only claim after you have assessed your goals, how you are going to get there and identified the technical difficulties in doing so.

You can claim from then up to when you have figured out how to achieve your goal and then the claim stops before production level.

What expenditure qualifies for R&D tax credit?

1) Staff and people costs

Staff costs can be included for employees’ time directly related to the R&D projects, as well as in limited cases for those performing qualifying indirect activities.  

Businesses should look at their employees and consider which of them have been directly involved with R&D activity. 

From there, you are then allowed to claim for the percentage of time they have spent on the project.

Realistically, no employee will be spending 100 per cent of their time on the R&D project – for example the managing director may spend a relatively low percentage of time in that area. 

For the year you should look at the gross salary costs, employer’s National Insurance/pension contributions.  

That will give you the qualifying costs for each relevant individual. You multiply that by how much time they have spent on the qualifying project and that will be your qualifying expenditure.

2) External consultant or subcontractor costs

This applies to costs incurred directly by the company and covers any expenses that were paid for consultants or subcontractors.  

Quite often a company won’t be able to carry out all aspects of R&D activity themselves, this will particularly be the case with SMEs.  

Businesses will have to outsource specific services, be that to consultants or contractors. It’s worth being aware that you can only claim 65 per cent of this cost back.

3) Consumables  

You can claim back for expenses on things that are used up as part of R&D activity. For example, costs of materials used.  

Businesses can also claim back for a proportion of heat, light and power – with the proportion dependent on the level of R&D activity.  

Some machinery costs may be covered under the scheme, but in general this would not be included, and instead fall under capital expenditure.

4) Software costs

You are entitled to claim for the costs of utilising third-party software as part of your R&D process. 

If you developed an operating system, internal tools or a feature for your software application that has relied on third-party applications then this would be eligible.

This could include, for example, specific software like CAD software. In most industries you will need to try different types of software to see what will work for you.  

What expenditure doesn’t qualify for R&D tax credit?

1) Capital expenditure

Capital expenditure is the purchase of fixed assets for your business. These are typically land or machinery used in your business operations.  

Even if a piece of machinery is purchased specifically to conduct R&D, it does not qualify for the tax credit system explained above.  

Instead there may be special capital allowances available.  

2) Researching patents and designs

Costs associated with researching patents and designs and filing for a patent are not eligible for R&D tax credit relief.  

3) Personal services or benefits

As part of your claim, you can’t include any personal expenditure that you incurred during the research process. So, no dinners with friends or running personal errands during working hours!  

4) Rent

We regularly have clients come to us and look to claim for rent – but this is a definite no.  

Office space rental can’t be claimed, even if your R&D work is carried out in that office.  

5) Prototypes

You can claim back on the costs of creating prototypes, including the costs of manufacturing and research, as long as the prototype is not actually sold.  

How Burgis & Bullock can help?

Our team is on hand to support you with any guidance around R&D tax credits. We are experts in this field and our vast experience will help to guide you through the process.

We offer an introductory phone call for no fee and would encourage any SMES or large businesses considering a claim to get in touch.

If you’re not sure, don’t worry and if do not have time to read all of the HMRC guidance, don’t worry – talk to an expert instead.

To find out how Burgis & Bullock’s specialist tax team can support with R&D tax relief claims, visit www.burgisbullock.com or call 01926 451 000.

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