What costs qualify for R&D tax credits?

Having found your way to the Kene Partners website, you may already know that Research and Development (R&D) tax credits are a UK government tax relief set up to reward businesses that invest in innovation.

Relief from the scheme, which HMRC provides in the form of a cash payment or corporate tax reduction, can form an essential part of business growth and even fund further innovation projects.

But what costs are eligible for relief? It’s a common question and you’ll find the answers in this article.

Costs that qualify as R&D expenditure

Businesses can claim R&D tax credits on revenue expenditure, like day-to-day operational spending. However, money spent on fixed – is not typically eligible. To note, Research and Development Capital Allowances (RDAs) can be included within an R&D tax claim on assets used for R&D purposes, or on providing facilities for carrying out R&D.

We also had some positive news last year, in that there are new cost categories to cover data and cloud computing.

Here are the eligible cost categories for R&D tax credits:

Staffing costs

Companies on both the SME and RDEC (typically large business) schemes can claim a proportion of the following for staff working directly on the R&D project in question:

  • Gross salaries and wages (including overtime pay and monetary bonuses, but not benefits in kind)
  • Employer’s National Insurance contributions (Class 1)
  • Employer’s Pension fund contributions

You can also claim for support staff as long as they work directly on the project, so project-dedicated administrative assistants and specialist cleaners, for example. You can’t claim on support employees if their work would have been carried out anyway, like regular cleaning or payroll administration.

Lastly, you can claim 65% of relevant payments made to any external agencies that provided workers specifically for the project.

Subcontracted R&D work

The rules for this one differ between SME and RDEC applicants.

Those using the SME scheme can, again, claim 65% of the relevant costs of using subcontracted workers for R&D activities.

RDEC applicants, however, can only claim if the subcontractor in question is an individual, a partnership of individuals or one of the following:

  • Charity
  • Higher education institute
  • Scientific research body
  • Health service organisation

Consumables

Simpler than it probably sounds, the consumables category covers items or materials that have been used or otherwise transformed in the course of your R&D project.

By “otherwise transformed” here, we mean something that’s no longer usable in its original form now the project is completed.

Examples of consumables that could be part of your R&D claim include:

  • Chemicals, fuels and other substances (even if you recycle them)
  • Materials and components used to create prototypes
  • Utilities like electricity, gas and water (a suitable proportion of these costs)

Any consumables sold on as part of the normal course of business cannot be included in a claim.

Software and other technology

The costs of any software used for R&D activities are eligible (both licencing and purchasing expenditure). However, you can only claim on software used directly in the R&D activities.

We also had some positive news last year, in that there are new cost categories to cover data and cloud computing. And while HMRC had initially been unclear on the details, it recently clarified that even indirect uses of cloud computing, such as storage, are now included.

Learn more about the impending adjustments by watching our recent round-table discussion.

Our experts are here to help

Even with a list of categories like this, navigating HMRC’s rules can be difficult.

If you need support for your next claim or just want to know more about how you can benefit from R&D tax credits, our experts can help. Book a free consultation today.

Relief from the scheme, which HMRC provides in the form of a cash payment or corporate tax reduction, can form an essential part of business growth and even fund further innovation projects.