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Which costs do not qualify for R&D tax relief?

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Author: Tom Mason

The R&D tax relief scheme offers businesses a significant incentive to innovate based on the expenditure they make on qualifying R&D activities – but not all costs associated with R&D projects qualify for relief.

There are a number of reasons behind this policy, many of which you’ll likely be aware of in the course of handling other tax reliefs or allowances. They include:

  • Businesses benefitting from an asset outside of R&D activities
  • An asset being purchased in the normal course of business activities
  • The cost not being directly related to R&D activities

You’ll need to consider this when preparing your clients’ R&D tax claims – taking particular care over costs which are explicitly excluded from qualifying expenditure.

Capital expenditure

This is often a point of contention for businesses, particularly as R&D projects can require a significant amount of capital, which can be costly.

Capital expenditure is not eligible for R&D tax relief in general.

This is because, for a piece of expenditure to be eligible for R&D tax relief, it must be an allowable deduction for the purposes of calculating pre-tax profit.

Your client will also benefit from capital expenditure over a number of years, making it difficult to identify what percentage of the cost qualifies as R&D expenditure in a given accounting period.

However, we can collaborate with you on tax planning for your client’s R&D project, to ensure they optimise access to both R&D tax relief and capital allowances.

Operating costs

There are certain operating costs for which your client cannot claim R&D tax relief because they are seen by HM Revenue & Customs (HMRC) as incidental or not sufficiently related to R&D.

Common examples of these costs include:

  • Land
  • Rent
  • Business rates

These costs aren’t eligible for R&D costs, even when the land or commercial space is used exclusively for R&D projects.

Production costs

Here lies another point of confusion for businesses and their accountants.

The cost of ‘producing and distributing of goods and services’ is not eligible for R&D tax relief as it is seen as a commercial cost rather than one which furthers R&D.

We find that distribution costs are accepted as being ineligible since they are clearly a commercial cost.

However, the cost of producing a good is often confusing because goods as a result of R&D must be manufactured as part of the project’s completion.

What this exclusion means is that the production of goods (even as a result of R&D) and its associated costs are ineligible for R&D tax relief – but the materials and labour costs of making the final product of an R&D project are eligible.

Therefore, what this section prohibits is claiming R&D tax relief on commercial activities.

We understand the difficulties associated with certain costs and their eligibility for R&D tax relief. To support your practice, we can advise you on the finer points of R&D tax relief to ensure that your clients’ claims are compliant and successful.

If you need guidance on preparing R&D tax relief claims for your clients, please contact our team today to discuss your requirements.