A big part of the R&D Tax Credits application is figuring out which costs you’re going to claim for. In this guide, we’ve laid out exactly which costs are eligible for R&D Tax Credits relief, and how to calculate how much you can claim.
There are 8 kinds of eligible costs:
More on each of these categories below. Helpfully, HMRC has also listed the costs that aren’t eligible for relief:
- The production and distribution of goods and services
- Capital expenditure (you can read more about capital expenditure here)
- The cost of land and hosting
- The use of or creation of a trademark
Because it’s HMRC, there are exceptions to each of categories. If you’re unsure whether you should include an expense in your tax credits application, the best thing to do is speak to an R&D Tax Credits expert.
Some helpful links:
- 10 insider tips and tricks for your R&D Tax Credits claim
- How to file R&D Tax Credits yourself
- R&D Tax Credits: How to figure out if a project qualifies
- Direct Staff Costs
This is the cost of paying employees that worked directly on the R&D project. Costs that qualify are:
- Class 1 National Insurance Contributions
- Pension fund contributions
- Reimbursed R&D-related travel costs
You can calculate how much to claim for by following this process:
- Calculate the total annual emolument (i.e. the total costs above) of an employee that worked on the R&D project
- Multiply this amount by the proportion of their time they spent on the R&D project in the year
- Do this for all employees that worked on the project, and add the figures together
Here’s an example:
- Externally provided workers (EPWs)
EPWs are temporary workers sourced from an external agency. They work like regular employees, but their contract is with the agency, not with you. Tax credits relief is usually given on 65% of the payments to the external agency, regardless of the size of your company.
Like normal staff, the cost of EPWs needs to be apportioned based on how much time the worker spends on the R&D project you’re claiming for. If the EPW charges VAT, that should not be counted as part of their cost.
- Subcontracted R&D
Generally speaking, subcontracted R&D means you’ve outsourced a piece of your R&D project to another company for an agreed free. If, for example, you hired an external firm to develop a certain software module on your behalf, that would count as subcontracted R&D.
Some good news – HMRC says that if a project qualifies for R&D Tax Credits then sub-projects related to that project also qualify for tax credits relief, even if they involve ‘routine’ work. Routine work meaning work that HMRC doesn’t consider R&D.
So, if a contractor is taking on a sub-project involving routine work, but that sub-project is part of a larger project that qualifies for R&D Tax Credits, then the subcontractor’s costs do qualify for tax relief.
Like staff costs, subcontractor’s fees must also be apportioned based on how much of that fee went towards the R&D project you’re claiming for. Like EPWs, companies can claim up to 65% of their subcontracted R&D costs.
Usually only SMEs can claim for Subcontracted R&D expenses. Large companies aren’t able to claim for Subcontracted R&D, unless its undertaken by “a charity, higher education institute, scientific research organisation or health service body — or by an individual or a partnership of individuals.” In which case, it’s classed as a contribution to independent research.
- R&D consumables
Consumables are materials and resources that are used or ‘used up’ in the R&D process. Included in this category are materials, water, light and heat. Electricity costs can’t be claimed. Consumable costs generally fall into one of two groups: apportioned expenses and wholly R&D expenses.
Utilities are usually apportioned expenses, meaning how much you claim for is based on how much of the cost can be attributed to R&D. For utilities, you can use the following method:
- Count up how many employees worked on the R&D project
- Find out the amount of time each of those employees spent on the project, as a percentage of total time at work
- Add up those percentages
- Divide that by the total number of people in the company
You have a company of five people. Two people spend 50% of their time on R&D. The other three spend none of their time on R&D. 50% + 50% = 100%. 100% / 5 employees (or ‘500%’) = 20%. So, 20% of the cost of eligible utilities can be claimed as R&D expenses.
Wholly R&D expenses are costs for consumables that are used solely in the R&D process. This could include a piece of equipment you need for the R&D project or an amount of metal you used to develop a prototype. More on prototypes below. You can usually claim 100% of these costs.
You can claim for the cost of software needed for R&D. If the software was bought purely to be used in R&D, then you can claim 100% of its price in your application. If the software package is only partly employed in R&D, it’s price must be apportioned, based on how much of its use is R&D-related.
- Clinical trial volunteers
Payments made to volunteers in clinical trials are eligible for R&D Tax Credits relief. This is usually only relevant to pharmaceutical firms.
- Contributions to independent research
These are payments made by large companies (read more about large companies vs. small companies) to other organisations carrying out eligible R&D. These payments qualify for tax credit relief, with these stipulations. The recipient must be conducting research relevant to your field or industry. The recipient must be also “a qualifying body” – a charity or higher education institute, scientific research body or health service organisation – or “an individual or partnership or individuals”.
Costs associated with the design and construction of a prototype needed to test the R&D you’re undertaking are eligible for R&D Tax Credits relief. 100% of these costs qualify, unless you’re planning to sell the prototype. In which case only a some of the prototype’s costs qualify for relief. Construction costs and materials aren’t ineligible for support.
Get in touch
Hopefully our guide has shed some light on which costs qualify for R&D Tax Credits relief. If you have any questions about the topics we’ve discussed here, or R&D Tax Credits in general, please get in touch. Our leading team of R&D Tax Credits experts would be happy to help!
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