Complete Guide: What Qualifies as R&D Expenditure
Research and Development (R&D) tax credits are crucial for company innovation and growth. These expenses allow businesses to develop new products/processes, improve existing ones, and find more efficient ways to operate. Understanding what qualifies as R&D expenditure is essential for businesses seeking to claim R&D tax credits.
Staffing costs
Staffing costs are all employment earnings (other than benefits in kind), paid to employees regarding expenses, employer NICs and employer pension contributions. Staffing costs are attributable to R&D if paid to directors or employees who are directly and actively engaged in the R&D activities.
Where the director or employee is only partly involved in R&D then the costs can be apportioned.
HMRC consider that reimbursed expenses, such as travel and subsistence, do not generally fall within the meaning of 'staffing costs'.
Externally provided workers
Payments made by a company to a staff provider in exchange for the staff providing a worker to the company can also qualify as R&D expenditure. A person is an 'externally provided worker' if:
- they are an individual who is not a director or employee of the company;
- they personally provide services to the company under the terms of a contract between the worker and a person other than the company i.e. the staff provider;
- the services are supplied to the company through a staff provider (e.g. a personal service company, staffing agency, group company);
- the worker is subject to supervision, direction or control by the company; and
- the provision of the services to the company does not constitute the carrying on of activities contracted out by the company (see below).
Such expenditure is related to the company's R&D activities if the externally provided worker is directly and actively engaged in such R&D.
For externally provided workers, companies can claim 65% of the staffing costs as qualifying R&D expenditure, provided there's no connection between the company and the staff provider. To increase the value of your claim, you can jointly elect with any unconnected staff providers to remove this 65% restriction.
Consumable items, computer software, data licences and cloud computing services
Consumable items: Consumable or transformable materials including water, fuel and power.
Data licence: is a licence to access and use a collection of digital data.
Cloud computing services: include the costs of access to, and maintenance of, remote data storage and hardware facilities and remote operating systems and software platforms.
Computer software, data licences, cloud computing services and consumable items are attributable to relevant R&D if they are employed directly in relevant R&D. An appropriate portion of the costs is allowed if the software etc. is only partly used in R&D activities.
Contractor payments
If your company subcontracts out R&D to a third-party subcontractor, those costs can be included as part of the R&D tax credit claim. 65% of the subcontractor payment qualifies as R&D expenditure. However, a joint election can be made for connected company treatment if the subcontractor is prepared to disclose their profit margin to the R&D company.
However, if a subcontracted is engaged to do non-R&D work but then the subcontractor decides to undertake R&D of their own, it is the subcontractor who is able to claim the tax relief. It is important for the details of the contracts to be worded carefully to help you secure additional tax relief and not give this up to the subcontractor.
Summary
Understanding what qualifies as R&D expenditure is essential for businesses seeking to leverage tax incentives and support for their innovation efforts. By recognising and documenting eligible costs, companies can effectively manage their R&D budgets and drive future growth.
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