Identifying qualifying costs is one of the more time-consuming and complex processes for submitting a compliant R&D tax claim on behalf of a client.
We understand, as does HM Revenue & Customs (HMRC), that R&D projects carry a significant number of costs associated with the most innovative work – but they must be directly related to the development work if they are to qualify for tax relief.
This is one of the areas where HMRC sought to offer clarity after the merging of the SME and RDEC schemes, as claims for non-qualifying costs were a major source of error which had driven the relief scheme’s overhaul.
We’re here to clear up any confusion you or your clients may have over costs they can and cannot claim relief on.
Staffing costs
Staffing costs qualify for R&D tax relief when they are directly related to R&D activities, including:
- Direct staff – Clients can typically claim relief for the cost of salaries, National Insurance and pension contributions for staff ‘directly and actively’ engaged in R&D activities.
- Externally provided R&D staff – Clients can claim up to 100 per cent of the cost for workers provided by an external agency if it is connected to their company, or 65 per cent if they are not.
- Volunteers – Making payments to clinic trial volunteers typically qualify under the current scheme.
When a staff member works on qualifying R&D only part of the time, timesheets and records are essential to demonstrate that your client is only claiming for eligible work.
Software
For accounting periods starting 1 April 2023 and onwards, it is permissible for businesses to claim on software costs, including:
- Data licences
- Software subscriptions
- Cloud computing services
As with other costs, these must be directly related to the R&D project itself. Your client cannot, for example, claim R&D tax relief for payroll software used to pay research staff, unless it is acquired specifically and exclusively for this purpose.
Capital investment
Capitalised costs and expenditure can muddy the R&D waters for even the most up-to-date accountant or business.
To qualify for R&D tax relief, a cost must be allowable when calculating taxable profits for the claim period, meaning that capitalised costs which benefit your client across a number of years are typically excluded.
Clients may instead need advice on maximising their use of capital allowances.
We can work with you to take a holistic view of your client’s tax affairs, optimising both capital allowances and R&D tax relief on qualifying costs.
For further guidance on qualifying expenditure for R&D tax relief, please contact our advisory team today.