Qualifying indirect activities – the overlooked parts of an R&D project

Qualifying indirect activities can seem like a murky area for those less familiar with HM Revenue and Customs’ (HMRC) R&D tax relief guidance, including the rules governing the R&D Expenditure Credit.

Many of your clients may not realise that a wide range of activities are still considered by HMRC as part of R&D work, even if they don’t directly contribute to resolving the uncertainty.

Our R&D experts have broken down a list of qualifying indirect activities to help you get the most out of R&D tax relief claims.

What are the qualifying indirect activities that can be included in an R&D tax relief claim?

Qualifying indirect activities are any activities that are needed to support the core R&D work but are not directly linked to the R&D itself.

There can be some confusion surrounding which of these activities counts as there are some administrative tasks that, while technically necessary for R&D work to take place, cannot be included in costs.

Ineligible expenses include payroll or building maintenance, as these would happen regardless of whether any R&D work was taking place.

However, administrative tasks that are necessary for the R&D to take place can be included.

This might involve administrative management, finance, and human resources services for employees who are active participants in the R&D work.

Financial activities that relate to directly supporting the R&D work, such as budgeting for the project or recruiting and managing R&D personnel can also qualify.

If the R&D project requires specific security that your client would not otherwise have utilised, then this can be considered a qualifying indirect activity.

As research is a core part of R&D, there is some scope for making academic connections to bolster a business’s research capacity.

Collaboration between companies and academic institutions, whether that research is carried out by students or researchers, can be included in a claim.

Similarly, feasibility studies wherein a client would determine the strategic direction of an R&D project also qualify as an indirect activity.

Be mindful, though, that market research does not count as that is motivated purely by economic concerns and not scientific or technological uncertainty.

Training staff to equip them with the skills and knowledge required to actually engage with the R&D project understandably qualifies as does the leasing and maintaining of facilities like laboratories and specialist equipment.

It is always worth getting clarification on whether any direct or indirect activity qualifies for a claim from a trusted R&D tax consultant.

How to verify qualifying indirect activities?

The main thing that needs to be proven to HMRC regarding qualifying indirect activities is whether the expense would have been incurred regardless.

The most effective way to show this is with detailed record-keeping and a focus on quantifying all of the costs that are associated with R&D work.

In the event of a Mandatory Random Enquiry Programme (MREP) dispute, the inclusion of qualifying indirect activities could prove contentious if they are not sufficiently evidenced.

Encourage your client to have clearly defined goals and an understandable strategy for their R&D work, as this will show why these qualifying indirect activities were necessary.

For example, it would be worth asking why specialist equipment was essential for the process and whether the same result could have been achieved without it.

All qualifying indirect activities need to be important activities that support the R&D project and would not otherwise be conducted by a business, so anything that falls outside of this remit cannot be considered.

As R&D tax consultants, we work with accountants like you to better support the innovative work conducted by your client.

We believe in maximising R&D tax relief claims while remaining fully compliant with HMRC guidelines. Our R&D tax relief calculator can provide an initial estimate of the relief available from these indirect activities.

Don’t let qualifying indirect activities slip under the radar. Speak to our team today!

Adam Bointon