Qualifying R&D expenditure: What can you claim?

If your business is carrying out research and development (R&D), there’s a good chance that you’ll be able to claim tax credits for your innovations.

The R&D Tax Credit is calculated as 25% of qualifying expenditure (increasing to 30% for accounting periods beginning on/after 1 January 2024), which can deliver significant savings for your business. These savings can be reinvested in more R&D or in other areas of your business, such as hiring new staff, training, or other areas of growth. The Revenue uses a very specific definition for qualifying R&D expenses, which are limited to “in the carrying on” of qualifying R&D activities. This essentially means that expenses must be directly and actively involved in the R&D process itself. While the definition is very specific, most innovative businesses are still able to claim for a broad range of expenditure on their R&D work.

Below, we summarise claimable expenses for the R&D tax credit, as listed in Revenue’s Research and Development Tax Credit manual.

Staff costs

Staff costs, including salaries, bonuses, pension contributions, health insurance, and other benefits dedicated directly to employees working on qualifying R&D activities can be claimed. These costs must be apportioned to reflect the balance of R&D effort; for example, if an employee spent 50% of their time on R&D and 50% of their time on other projects, then half of their staff costs can be claimed.

Materials

The cost of materials and supplies consumed directly in the R&D process are eligible for R&D tax credits, but only after removing the saleable element (i.e., the materials must only be used for testing and prototyping and not sold on).

In circumstances where there is a saleable product at the end of the R&D, you must deduct the lower amount of either the original material cost or the potential resale value.

Utilities

Utility costs such as gas, electricity and water are all considered eligible expenses for R&D tax credits, but only if they have been consumed specifically in R&D activities. In these circumstances, it’s reasonable to use an apportionment to claim the tax credit.

Subcontracting

Companies can claim R&D Tax Credits for subcontracted work under specific circumstances.

Firstly, businesses can subcontract qualifying R&D activities to universities or institutes of higher education from an EU Member State. If they do so, they can claim a tax credit of up to the greater of 15% of their own R&D spending or €100,000 annually.

Secondly, a company can claim R&D tax credits on costs incurred when subcontracting qualifying R&D activities to another business or when using agency staff, provided the subcontractor is not a connected party. Again, the R&D tax credit is limited to the greater of 15% of the company’s own R&D expenditure or €100,000 annually. However, the company needs to notify the subcontractor before the company settles its invoice to the subcontractor that it intends to use the payment in its R&D Tax Credit claim.

Individual consultants hired to conduct sub-contracted R&D activities can be treated as direct employees for the purposes of claiming expenses provided they meet some specific conditions.

Rental costs

Rental costs may be eligible but only if it meets specific requirements.

Is the rental space simply an area where R&D takes place along with the other activities (e.g., an office or manufacturing facility)? If this is the case, the expenditure is not eligible.

If, however, the rented space is specialised in some way (e.g., it’s a laboratory, clean room, technically unique space, etc.) so that the nature of the room itself is integral to carrying out R&D activity, then the rental costs for the space might be considered a qualifying expense.

Cloud computing costs

Cloud computing costs incurred for the qualifying R&D activity are eligible for R&D tax credits.

Royalty Payments

Expenditure on royalty payments may qualify provided they are for the purposes of R&D subject to requirements. More specifically, expenditure is not allowable where it includes amounts paid to connected persons and which is, income from a qualifying asset for the purposes of the Knowledge Development Box for the recipient.

Can we claim for R&D expenditure R&D on our existing business operations?

It depends. Companies can claim an R&D tax credit for qualifying research and development expenses that are part of their existing business operations. However, only additional costs for R&D activities are eligible.

What doesn’t qualify as R&D expenditure?

Aside from the exceptions detailed above, some examples of expenditure are clearly defined as not being eligible for tax credits. These include general overhead costs such as:

catering
recruitment
insurance
travel
maintenance
broadband and telephone costs
bank charges
other indirect overheads

How Leyton can help

At Leyton, we combine our knowledge of tax credits and exemptions with field experience of research and development in a variety of different engineering, technical and scientific fields. This means that we’re able to work through the details of your innovative projects to uncover qualifying R&D expenses that might have otherwise been missed. This can result in substantial savings for your business.

Speak to one of our experts to find out how we can help your team identify qualifying R&D expenditure.