R&D Tax Relief

M O D U L E   D O W N L O A D

Qualifying costs
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Claimable costs
What costs qualify?

The costs that normally make up the majority of a claim for R&D tax credit are:

• Staff costs (gross salaries, employer NICs and company pension fund
contributions) for those directly engaged in qualifying R&D activities

• Externally provided staff costs for workers directly engaged in qualifying

activities, who have been provided to the company and are paid by an agency

• Subcontracted R&D costs. Note, however, that where a large company

subcontracts R&D to an SME, it cannot usually claim tax relief for the
subcontracted work under the RDEC scheme

SMEs may claim for the costs of subcontractors that engage in qualifying direct
R&D activities. They may claim staff time spent on qualifying indirect activities, but
not subcontractor costs.

There are a number of other costs that may be eligible for relief when they relate to
qualifying direct or indirect activities, including:

• Travel and sustenance costs incurred by salaried staff/directors while they were
directly contributing to R&D (but only where the staff member personally
covered the costs and was reimbursed by the company)

• Costs of energy consumed in R&D activities

• Costs of materials consumed in the R&D process

• Software licences costs, where software is needed to carry out R&D

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 • Clinical trial volunteer costs

Costs that do not qualify

Here are some of the costs you may incur in the R&D process that do not qualify for
R&D tax credit, but which often creep into R&D claims:

• Travel and sustenance costs paid for by the company

• Transport and distribution costs

• Costs of external contractors supplying maintenance, security and repairs

services

• Rents and rates

• Directors' dividend payments

• Staff recruitment costs, where the costs are invoiced from a recruitment
agency

• Telecom, broadband and hosting costs

• Hardware and equipment costs (except in relation to small items that are
consumed during the R&D project and have no residual value when it ends)

This is not an exhaustive list!

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Staff and other key costs

Whether a staff member is internal or externally provided, where only a proportion
of their work constitutes qualifying R&D activities, only the same proportion of their
staffing costs (for the accounting year being claimed) will qualify for R&D tax credit.

Internal staff

Internal staffing costs of directors or employees can be claimed at 100% of the

relevant costs.

Externally provided staff

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If the company and staff supplier are not connected, the company can claim relief
on 65% of the relevant portion of costs paid to the agency for providing external
staff that spent time on R&D activities

If the company and staff supplier are connected (e.g. they are part of the same
group), the company can claim relief on 100% of the lower of:

• the relevant costs paid to the staff supplier

• the relevant costs incurred by the staff supplier

Subcontractor costs

Under the SME scheme, a company may claim for 65% of qualifying costs paid to
unconnected R&D subcontractors.

Other claimable costs

A company can claim relief on 100% of qualifying R&D costs incurred on:

• Energy (gas, electricity, water) consumed during the R&D process

• Software licences, where the software is used for R&D activities

• Materials consumed and exhausted in the R&D process. (Note: if the materials
will be sold as part of a final product, etc they cannot be claimed)

Where the exact portion of these costs used for R&D is not known, a fair estimate
can be used as part of your claim.

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Cost breakdown
You could ask your clients to categorise their eligible R&D costs under headings, to
produce a breakdown of expenditure that qualifies for tax relief. It is best practice
to provide HMRC with a R&D cost breakdown against the claimable cost headings
as shown:

• Staff

• Subcontractors (you must state whether a subcontractor is a connected or an

unconnected company)

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 • Externally provided staff (you must state whether externally provided staff have
been provided by a connected or an unconnected company)

• Materials consumed

• Software licences

• Energy consumed

• Clinical trials

• Travel and sustenance related to qualifying R&D activities, paid for by a

member of staff and reimbursed by the company

All expenses included in a breakdown of costs that qualify for R&D relief must relate
to revenue expenditure accounted for in the company's trading profit and loss in
the year in which the claim is being made.

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Common pitfalls
Outlined below are some common mistakes companies make when determining
what counts as a qualifying R&D cost.

Staff costs

A common pitfall of companies is to allocate 100% of a person's time to R&D.

There will always be certain tasks a staff member has carried out that were not R&D,
so HMRC will tend to query claims for 100% of staff costs for any individual.

Directors' costs and dividends

If a director has not paid themself a salary, they cannot claim relief for the R&D staff
costs of their R&D activities. Dividends are not expenses, so they are not qualifying
R&D costs.

Directors of connected companies

Where a director of a claimant company carries out R&D for the company then
invoices the claimant company from a separate, connected company they are also a
director at (as though they are a subcontractor), this is viewed as suspicious by
HMRC.

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Subcontracted R&D

When claiming for subcontractor costs, it is important to ensure the commercial risk
is held by the claimant company.

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