Which Costs Can You Include In An R&D Tax Claim?

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Are you stuck on which costs to include in an R&D tax claim?

….Or fearing you may have claimed R&D costs that you shouldn’t have?

….Or underclaiming qualifying R&D costs?

Well, I am here to help 🙂 

Introduction 

On this episode we will be talking about the costs you can include in an R&D tax claim.

We can start off covering the costs for an SME. 

So from the previous episode, you will know there are two types of R&D tax claims you can make.
The first is for SMEs  and the second is larger firms under the RDEC scheme.

We will first cover the SME scheme.

Within the SME scheme, the claimant can include costs for staff, subcontractors, externally provided workers (EPWs), consumables, software and clinical trial volunteers.

So let’s dive straight into these costs. 

Staff costs 

The costs of employees can be included in an R&D tax claim.

These costs would typically include salary, company national insurance contributions, company pension contributions and reimbursed expenses. 

The amount of costs that should be claimed in connection with an employee depends on how much 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 NIC and company pension contribution should 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. 

Subcontractors

The next costs to address are subcontractor costs. 

Subcontractors are hired when work is contracted from the claimant company to a third party. 

Subcontractor costs are restricted to 65% when included in the R&D tax claim, unless the claimant company and the subcontractor are connected. 

Externally Provided Workers

The next cost included within an R&D tax claim is externally provided workers (EPWs).

EPWs are temporary workers contracted through a third party, but work for the claimant company. The claimant company pays the agency, while the third party pays the staff member through pay as you earn.

An example would be agency workers. 

EPW costs are capped at 65% however more can be claimed if the claimant company and the EPW are connected. 

Consumables & Utilities

Consumables are materials that are consumed or transformed during the project. For example, the purchase of materials to develop a prototype drone would qualify as a consumable, as would buying chemicals to develop a cleaning product. 

Any form of material that can not be used again is treated as consumed or transformed. 

As part of consumables, utilities can be claimed such as heat and power. At GrowthPad we treat this as a separate cost, but it is part of consumables. 

As an example, if your client is using its premises and having to pay for heat and power your client can claim a portion of that cost into their claim. 

The method used to calculate the portion is however 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. 

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. 

Server costs are excluded. 

Costs of production are not allowed to be included in the R&D tax claim. This will include developing a prototype and then selling the prototype. However any materials scrapped in developing the prototype can be included in the R&D claim. 

Software 

If software is used in development such as CAD or other software licenses, these costs can be claimed. 

Volunteers for clinical trials  

Finally, costs for getting volunteers for clinical trials can be included in an R&D tax claim. 

For example, if a pharmaceutical company has created a new medicine and it needs testing, the costs that are associated with hiring volunteers to undertake human testing can be claimed. 

RDEC Scheme

As we have covered costs associated with an SME let us briefly run through the costs under the RDEC scheme. 

The costs include staff, EPW’s, consumables, software and volunteers for clinical trials. 

Subcontractor costs are excluded from RDEC claims, unless it is associated with a qualifying body, individuals or a partnership made up of individuals with the exclusion of corporate members. 

The qualifying body is essentially a university, research body or a charity. 

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Tehsin Khan

Tehsin Khan

Tehsin is an experienced tax professional with 12 years of experience helping companies and individuals save money. He has worked for the most reputable tax firms in the country before setting up GrowthPad. In his spare time, Tehsin contributes to national tax publications and plays the odd game of football.

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