R&D tax relief offers a great opportunity for companies to save on their tax bill when they’re spending money on innovative work.
As long as your project meets the criteria set out by HMRC, you can claim for a range of R&D-related costs, including staff, consumables, software and more.
Here’s what you need to know.
Which costs can you claim as R&D?
Generally speaking, your R&D costs need to relate directly to the project at hand – and not to the production of goods or services, or costs you would have incurred in your business anyway.
In some cases, you can apportion an amount of the costs for R&D relief based on an estimation of what’s related to actual R&D work.
It’s possible to claim for the salaries, wages, class 1 National Insurance contributions and pension contributions of staff who are directly engaged in R&D.
That might be those doing the ‘hands-on’ side of things – the scientists, engineers or researchers – but it could also be a proportion of managerial, supervisory, admin or support time from other employees.
You just can’t claim for clerical or maintenance work that would have been done anyway.
Subcontractors and external agencies
If you hire subcontractors to carry out R&D work, or if you pay an agency to supply staff for your project, special rules apply.
Under the SME scheme, the amount you can claim in either case is reduced to 65%.
If you’re claiming the R&D expenditure credit (RDEC), the same reduced rate applies for externally provided staff, but you usually can’t claim for subcontractors at all. Some exemptions apply to this, though, so talk to us to check whether you might be able to claim this cost.
Anything you directly use and consume as part of a qualifying R&D project can be claimed – this could be materials that are used up, or a portion of water, fuel and power costs.
The cost of materials that have been incorporated into products sold are not available for relief, however, having been made ineligible for the scheme in April 2015.
If you’ve directly used software as part of your R&D work, you can claim this cost. If you used the software for other tasks too, claim the portion that relates to direct R&D.
Prototypes that are built in order to test the R&D will usually qualify in a claim, unless they’ve also been built for sale – in which case, you’ll need to split the costs between R&D expenditure and production.
Large companies can claim relief on contributions they make to independent R&D research which are directly related to their trade.
Pharmaceutical or research organisations can claim on the cost of clinical trial vouchers they provide to volunteers taking part in their research.
And where two companies collaborate on R&D, each can claim the costs they incurred.
Which costs can’t you claim?
Some costs aren’t eligible for R&D relief, including:
- production and distribution
- capital expenditure
- the cost of land
- patents and trademarks
- rent or rates.
What period are you claiming for?
The other important thing to work out in your R&D claim is the precise timeframe in which you conducted qualifying R&D work.
R&D officially starts when you begin working to resolve the uncertainty – when you’ve identified which technical issues need to be resolved, and checked that no one else has been able to resolve them.
It ends once you’ve resolved the uncertainty or stopped working on resolving it. Essentially, by the time you’ve got a working prototype that solves the problem, your R&D project is over. Production might then begin, but this is not part of R&D in HMRC’s eyes.
If a new technological or scientific uncertainty crops up during the course of production, you might need to resolve it. In that case, R&D work can start again.
How to calculate R&D tax relief
Putting all this information together, there are five key steps to calculating the total amount of R&D relief – known as ‘enhanced expenditure’ – to claim on your company tax return:
- Work out your R&D costs
Within the time period your R&D work took place, look at all the qualifying costs you incurred.
- Make the 65% reductions
Remember, you can’t claim the full costs for subcontractors or external agencies: instead, you need to reduce those figures to 65%.
- Add it all up
Add together all the different types of costs that qualify for your claim to get the full cost of your expenditure.
- Multiply by 130%
To get your additional deduction, multiply your total figure by 130%.
- Add this to your original expenditure figure
Finally, add your 130% figure to your original (100%) figure. The final total is your enhanced expenditure, which you can enter in your tax return.
Contact us to talk about your R&D tax relief claim.