One of the eligible costs that can be included in an R&D tax relief claim is the salary of an employee for the time they spent working on an R&D project.
While some businesses may find it easy to calculate this cost as they rely solely on an in-house team of competent professionals, as R&D tax consultants, we understand that it can be complicated.
Subcontracting, temporary staff and externally provided workers all require particular consideration when filing an R&D tax relief claim so we want to help you understand how this can be handled in a fully compliant way.
How are different employment costs handled in R&D tax relief claims?
To be able to fully determine the way in which a person’s salary is to be treated in an R&D tax relief claim, it is vital that the working relationship be clearly defined.
Staff costs for regular employees are treated differently from those incurred by subcontractors and externally supplied workers, so they need to be apportioned appropriately.
For subcontractors, it is important to establish whether there is a connection between the business making the claim and the contractor or not.
For unconnected subcontractors, only a portion of the cost (65 per cent) is eligible for inclusion in an R&D tax relief claim.
Connected subcontractors are more complicated to include, as there is a fear that some businesses may take advantage of the system by overcharging for subcontracted R&D work if the connected companies can benefit.
HM Revenue and Customs (HMRC) are likely to sense check the economic value of the R&D work conducted by connected subcontractors and is more likely to ask for clarification of the costing.
If it is discovered that the cost has been inflated for any reason, this will need to be defended and shown to have been necessary.
We would strongly advise against any practice that could be viewed as fraudulent by HMRC and recommend being cautious when including costs of connected subcontracted R&D work.
Externally provided workers need to have conducted the R&D work in the UK to be eligible for inclusion in the R&D tax relief claim.
It is also important that they are paid under UK PAYE and are subject to UK National Insurance Contributions (NIC) to be truly eligible for inclusion.
How can employee costs be compliantly managed in R&D tax relief claims?
The biggest pitfall surrounding employee costs in R&D tax relief claims is a lack of clarity surrounding the work conducted.
Only the time spent doing R&D work can be included in an R&D tax relief claim, while routine and regular work must be excluded.
Many businesses still struggle to correctly apportion this time, so accountants can make recommendations about better record-keeping to mitigate this problem.
HMRC are keen for the standards of R&D tax relief claims to improve, so while it is still possible to estimate the time spent conducting R&D, more accurate systems of dividing time result in a stronger defence from enquiry.
This will be especially true when handling the costs of subcontracted workers and externally provided workers, as their inclusion can pique HMRC’s suspicion in a claim.
Ultimately, all R&D tax relief claims benefit from a strong foundation of supporting evidence that results in better initial claims and more robust enquiry defences.
As an R&D tax consultant, we can work with you to help innovative businesses improve their processes and benefit more from R&D tax relief claims.
