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When accountants provide R&D assistance, they will be the ones tasked with overseeing the allocation of costs within an R&D tax relief claim.
It may not be apparent which costs can be included and which cannot in an R&D tax relief claim and getting it wrong can render a claim invalid or see an innovative business miss out on vital funds.
As R&D tax consultants, we support accountants who want to help clients with R&D by making it clear how to engage with qualifying expenditure.
What counts as qualifying expenditure in R&D tax relief claims?
Costs that are incurred due to undertaking a project that counts as R&D for tax purposes will generally be considered qualifying expenditure.
While some of these may be apparent to most engaging with a claim, there are some that can be overlooked.
HMRC provides the following list of what is considered qualifying expenditure:
- Staffing costs
- Consumables
- Externally Provided R&D Workers (EPWs)
- Subcontracted work
- Software licences
- Data licences
- Cloud computing services
- Clinical trials
This is a broader collection of expenses than many businesses anticipate and it is of benefit for accountants to engage more closely with innovators to determine the value of qualifying expenditure.
How is qualifying expenditure handled in an R&D tax relief claim?
Knowing what counts as qualifying expenditure is not sufficient for getting the most value out of an R&D tax relief claim.
Each piece of qualifying expenditure needs to be carefully assessed to apportion only the amount that was incurred through work on a valid piece of R&D.
For instance, a business will likely have a range of staffing costs, but it would not be appropriate to include all of them in an R&D tax relief claim.
Instead, it is necessary to calculate how much of an individual’s time was spent conducting work on a project and apportion a percentage of their salary accordingly.
Where this becomes more complex is when one individual conducts work across multiple R&D projects, all of which may be included in a single R&D tax relief claim.
In that instance, it is vital that the time spent on each project is noted so that the apportionment can be accurate.
Most importantly, when calculating qualifying expenditure, you should ensure that it does not accidentally encompass any routine work that may be conducted alongside the R&D.
Sticking with staffing costs, a competent professional may conduct routine maintenance and improvements to a process as part of their daily duties.
Even when this work occurs in close proximity to the R&D, the associated costs should not be mixed in with the actual advance that is taking place.
While it may not be possible to account for every second of every day, HMRC expects sufficient evidence to indicate that the apportionment of costs is accurate and just.
This will be particularly true if an individual spends an extensive amount of time conducting R&D work, as a large apportionment of costs has historically been an indicator of error and fraud – though legitimate instances do occur.
The best way to get a handle on qualifying expenditure is by working with an R&D tax consultant.
Our team are experts at capturing the full scope of qualifying costs, increasing the value of claims while preserving their legitimacy.
We also know how to handle enquiries, something that often requires additional evidence for qualifying expenditure in order to demonstrate that the cost apportionment was accurate.
Knowing how to properly handle qualifying expenditure can enhance the ways that accountants help clients with R&D by providing innovators with greater access to funds.
For expert support with qualifying expenditure, get in touch with our team.
Adam Bointon is a Technical Director specialising in R&D Tax Credits for SMEs in manufacturing and software sectors. With over 15 years’ experience, he works closely with businesses to identify qualifying R&D activities and prepare clear, compliant claims. He combines technical expertise with a strong understanding of economics and finance to support successful outcomes. Adam also contributes to industry webinars and CPD sessions, sharing insights on R&D tax relief and HMRC requirements.
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