If your business has undertaken a research and development (R&D) project, you can claim tax relief for eligible R&D expenditure. Not sure what qualifies as eligible R&D expenditure? No problem. In this article, we’ll walk you through each of the eligible categories of qualifying expenditure for claiming valuable R&D Tax Credits.
Understanding the R&D Tax Credits schemes
R&D Tax Credits let you reduce your taxable profits or claim a credit based on what you’ve spent on eligible R&D activities. There are separate R&D schemes, and which one applies will depend on your circumstances:
- Merged scheme: Most companies, large or small, would apply through this scheme (for accounting periods starting from 1 April 2024)
- Enhanced R&D intensive support (ERIS): This scheme is for loss-making SMEs whose R&D spend is at least 30% of total expenditure
Categories of qualifying R&D expenditure
There are several categories of qualifying expenditure for claiming R&D tax relief. These currently include:
- staff costs
- consumables
- externally provided R&D workers (EPWs)
- subcontracted work
- software licences
- data licences
- cloud computing services
Staff costs
Staff costs qualify for R&D tax relief, you can not only claim for employees who worked on R&D projects directly, but also if they were engaged in “qualifying indirect activities” such as maintenance, admin, research or other activities that form part of the R&D project but don’t directly contribute to the resolution of the uncertainty. It’s likely that some employees, such as directors, will only have contributed a proportion of their time to research and development. In these circumstances, you can claim for an appropriate proportion of their time.
Staffing costs are defined by HMRC as money spent on employing staff directly who are actively engaged in carrying out R&D, including:
- salaries, wages and any profits other than benefits in kind
- secondary class 1 National Insurance contributions paid by the company
- pension fund contributions
Staffing costs are generally reserved for employees, i.e., someone with a contract of employment for your company.
Consumables
You can claim for consumable or transformable materials and utilities used in qualifying R&D activity. Consumables broadly include fuel, water and power. HMRC also defines consumables as items that are no longer useable because they have been exhausted or “transformed” during R&D. For example, lab chemicals or components that have been incorporated into prototypes and are therefore effectively transformed, i.e., they can’t be used for anything else.
Consumables used indirectly don’t count as qualifying expenditure; however, you can claim for a portion of consumable items if you have partly used them for R&D activity. For example, you can claim an appropriate proportion of your electricity spend if your building’s power supply was somewhat used for R&D activity and somewhat used for other non-qualifying activities. If you’re unsure what an appropriate proportion would be, HMRC say “a broad-brush apportionment based on floor area or staff numbers” would be a suitable way to work out spending. Once the R&D phase is complete, and the products created become part of your day-to-day business, you can no longer claim relief on the consumables used to create the products.
Externally provided R&D workers (EPWs)
You can claim for the costs for externally provided workers (EPWs). These costs come from when you use staff providers for workers who are directly and actively engaged in carrying out R&D activity.
You can claim 65% of EPW wage costs of UK-based EPWs paid to the staff provider. Connected EPW costs are allowable as long as they have been paid through a UK payroll. If an EPW doesn’t work full-time on R&D activity, then you can claim for an appropriate proportion of their costs. From 1 April 2024 exclusions apply to EPWs not paid through a UK payroll (see the below section on overseas expenditure).
Subcontracted work
Under the Merged scheme, you can claim 65% of the costs of UK-based subcontractors for activities related to R&D, as long as your company initiated the R&D.
HMRC defines subcontracted work as R&D activities carried out to fulfil a contract’s terms. These activities can form part or the whole of an R&D project. Subcontractors have to do the work themselves (i.e., they can’t subcontract the work out again to a third party). Only one party to a contract can claim relief for R&D.
As with EPWs, from 1 April 2024, there will be restrictions placed on claiming for overseas expenditure on subcontracted work (see the below section on overseas expenditure).
Overseas expenditure
For accounting periods beginning on or after 1 April 2024, you can generally only claim for R&D work that has taken place in the UK. The same restriction applies to subcontracted work and EPWs: you can only claim for workers paid through a UK payroll.
The UK Government has outlined some exemptions, including when you can’t do the work in the UK. This might be due to geography or environmental conditions (for example, arctic climate change research), or where there are regulatory or legal reasons for carrying out the work abroad (for example, clinical trials). Unfortunately, cost savings aren’t a valid reason for conducting R&D abroad, or for using overseas contractors.
Software licences
You can claim for costs for computer software licences used for carrying out R&D activity. If you have only partly used the software for R&D work, you can claim an appropriate proportion of costs.
Data licences
Licence payments for datasets and data analytics are eligible expenses for R&D Tax Credits. You can only claim if you’ve used data for research purposes, i.e., you cannot claim if you commercially publish or sell the data onwards. You can claim for an appropriate proportion for licences only partly used for R&D activity.
HMRC defines data licences as “a licence to access and use a collection of digital data. This includes datasets.”
Cloud computing services
Costs for cloud computing services are eligible expenses for R&D Tax Credits. You can claim for an appropriate proportion if you have only partly used the cloud computing services for R&D activity.
HMRC defines cloud computing as “the provision of, access to, and maintenance of, remote data storage and hardware facilities and operating systems and software platforms”.
What R&D costs can’t be claimed for?
Some costs don’t count as qualifying R&D expenditure. These include:
- producing, marketing or distributing your products or services
- capital expenditure on buildings and equipment
- the cost of land
- creating patents and trademarks (see Patent Box instead)
I’m still not sure if my business’ R&D expenditure qualifies for claiming tax relief!
If you have any questions about eligible expenditure that are specific to your R&D activity, we’d love to hear from you. Our highly qualified tax and technical consultants are here to help with your R&D tax relief claim.
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