You can claim qualifying research and development (R&D) costs in your R&D claim. These costs are mostly limited to revenue expenditure and generally exclude capital expenditure.
R&D Costs
Eligible R&D expenditure includes:
- Staffing
- Consumables
- Subcontractors
- Externally Provided Workers (EPWs)
- Software
- Volunteers for clinical trials
Staffing costs
The cost of employees can be included in an R&D tax claim.
These costs would include salary, company national insurance contributions, company pension contributions and specific reimbursed expenses.
The amount of costs that should be claimed in connection with an employee depends on the time they spend on the project.
For example, if an employee spends 75% of their time in the accounting period on a qualifying project, then 75% of their salary, company national insurance contributions and company pension contribution can be included in the R&D tax claim.
There are some costs that are excluded from the R&D tax claim and these are dividends, benefits in kind, redundancy costs and recruitment costs.
Consumables
Consumables are materials that are consumed or transformed during the R&D. Any form of material that can not be used again is treated as consumed or transformed.
Examples include:
- materials to develop a prototype drone
- chemicals to develop a cleaning product
Utility costs are treated as consumables. You can therefore include light, heat and power in the R&D claim under consumables.
As an example, if a company is using its premises and paying for heat and power it can claim a portion of that cost into their claim.
It is very uncommon for 100% of utility costs to be treated as qualifying R&D. This cost must be split into qualifying R&D and non qualifying R&D. The method used to calculate the portion is up to the claimant.
At GrowthPad, in most cases, we use the formula of R&D staff costs over the total staff costs, multiplied by the amount of utilities paid throughout the year.
Care must be taken when claiming consumables as cost of production should be excluded from the R&D claim. Cost of production would include claiming the consumables of a prototype drone and subsequently selling the prototype.
Consumables must be scrapped in R&D development process to be included in the R&D claim.
Unfortunately data that is purchased by a software company for development and testing purposes can not be included, due to it not being consumed or transformed and server costs are excluded.
However, in the Autumn Budget 2021, the Chancellor announced that R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud computing costs.
Subcontractors
Subcontractor costs related to the qualifying R&D project are restricted to 65% when included in the R&D tax claim, unless the claimant company and the subcontractor are connected.
The rules on subcontractors can be complex.
Externally Provided Workers (EPWs)
EPWs are workers provided by a staff provider. The easiest way to understand this is they are similar to agency staff.
EPWs work under the control of the claimant company.
EPW costs are capped at 65%, however more can be claimed if the claimant company and the EPW are connected.
Software
Software used in development such as CAD or other software licences, these costs can be claimed.
Volunteers for clinical trials
Limited to the pharmaceutical industry, the costs of paying volunteers to take part in human testing can be claimed.
RDEC scheme
The eligible costs associated with R&D tax relief are mainly for the SME scheme. The RDEC scheme has limitations.
The costs eligible for the RDEC scheme include:
- Staff
- EPWs
- Consumables
- Software
- volunteers for clinical trials.
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Subcontractor costs limited to:
- A qualifying body (university, research body or a charity)
- Individuals
- Partnership made up of individuals (excludes corporate members)
The 65% restriction does not apply.
