Understanding which costs qualify for R&D tax credits

Business

Qualifying costs when claiming R&D tax credits

If your business is claiming R&D tax credits for the first time, you’ll need to know what costs qualify for the relief. Broadly, eligible expenses are described as day-to-day operational costs, i.e. those without which the project couldn’t move forward. Here, we speak to tax specialists R&D Tax Solutions about what the qualifying costs are and who can claim them.

Staffing

For both SMEs and large companies, staffing costs such as salaries, pension contributions and NI contributions can be claimed for. Benefits and director dividends, however, are excluded. If, therefore, directors spend a substantial amount of time on the R&D project, this can have a big impact the tax credit claim.

Many staff are only engaged in the R&D activity as part of their daily commitments. It’s often necessary, then, to apportion the total staffing costs appropriately.

Externally provided workers (EPWs)

If your project involves the contracting of workers through a staff provider, such as agency staff or freelancers, the costs for them can form a part of your claim. The EPWs must be under the supervision or control of your business and engaged in the R&D activity at any degree. As with full-time staff, if they also work on non-R&D projects, their costs should be appropriately apportioned.

Subcontracting

SMEs can claim 65 percent of payments made to unconnected parties as part of their submission. Claims involving connected subcontractors have a different and more complex set of rules, for which you should seek advice from a tax professional.

If you’re claiming under the RDEC scheme, you can only claim for subcontractors if they are an individual, a partnership where all partners are individuals, or a qualifying body such as a charity, university or scientific research organisation.

Consumables

Both SMEs and large companies can claim for these. Consumables refer to expenses such as those made on water, fuel and power. Other materials commonly claimed for also include the materials used in the construction of prototypes. Those items or utilities that are consumed or transformed directly for the purposes of the R&D activity can be claimed for.

Once your R&D project is complete and the purchasing of consumables relates to fine-tuning or marketing your product, you will not be able to claim for R&D tax credits.

Software

Certain computer software can form a qualifying cost for your claim, whether you are an SME or large company. As for other expenses, if the software is used only partially for the project, you must apportion the costs appropriately.

Clinical trial volunteers

This naturally relates only to the pharmaceutical industry, but the payment of those involved in clinical trials to test drug efficiency can be claimed as part of an R&D tax submission.

Making a claim

Accurate, real-time record keeping is the best way to keep track of the expenditure that qualifies for an R&D claim. Small businesses can take advantage of this R&D tax credit claim template for SMEs in order to work out the value of the reward they could expect, while larger companies should refer to details of accounting for RDEC to help with their claim.

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