Can my client include VAT in R&D tax claims?

We know that VAT can significantly increase costs for businesses undertaking R&D – particularly as certain R&D activities can be costly, requiring substantial investment. This is the financial outlay that the R&D Expenditure Credit is designed to alleviate.

This is particularly true for businesses whose input VAT far exceeds that of output VAT, such as loss-making businesses or those with significant costs relating to items that incur VAT, such as materials for R&D.

We therefore understand that many clients will want to recoup as much of this cost as possible, so – can your client claim for VAT costs with their R&D tax claim?

This depends entirely on their VAT status.

As a rule of thumb…

As a general rule, your client will not normally be able to include VAT costs within their R&D tax claims.

This is because the majority of businesses fall into one of three VAT categories – standard rated, reduced rated and zero rated.

As you know, businesses in these categories are able to recover VAT costs through a VAT return and therefore will not be able to reclaim these costs again through R&D tax credits.

HMRC would likely view this as an attempt to reclaim the same cost twice, hence why businesses eligible to charge VAT cannot reclaim it through the R&D tax scheme,

Are there exemptions?

However, there are some exemptions to this rule.

The main exemption is those businesses which are VAT-exempt, such as:

• Businesses with a turnover of £90,000 or less
• Those in certain sectors, such as education or charities.

While these sectors are not represented as heavily in the R&D tax as industries like manufacturing or life sciences, is it still possible for individual businesses within these sectors to claim R&D tax.

The reason for this exemption is fairly straightforward – VAT-exempt businesses cannot reclaim VAT spent against VAT charged, so HMRC would not view including VAT in a claim for these businesses as claiming for the same cost twice.

For further support with advising your clients on R&D tax claims, please contact our team today.

Adam Bointon