R&D tax relief is a great benefit for UK companies that innovate. Knowing which costs are claimable can increase the amount your business gets. In 2022/23 UK companies claimed £7.5bn of R&D tax relief.
Qualifying R&D and Scientific or Technological Uncertainty
To determine claimable costs, first you need to identify qualifying R&D activities. According to HMRC, qualifying R&D projects must seek to achieve an advance in science or technology by resolving scientific or technological uncertainties. This means your project should be seeking to create new knowledge or improve existing processes, products or services through scientific or technological change.
Eligible R&D Claim Costs and Reimbursed Expenses
Once you’ve confirmed your project is qualifying, you can consider the following categories of expenditure for your R&D tax claim:
1. Staff costs
Salaries, wages, bonuses and employer National Insurance contributions for staff involved in R&D activities are eligible. This includes not only researchers and developers but also supervisors and managers overseeing R&D projects. Plus employer pension contributions for these employees can be claimed. Plus reimbursed expenses for staff working on R&D projects can be claimed.
2. Externally provided workers (EPWs)
Payments to agencies or staff providers for workers working on R&D activities are eligible. However these workers must work under your company’s supervision and direction to be eligible.
3. Subcontracted R&D
Costs of R&D activities subcontracted to third parties can be claimed, but the eligibility criteria vary depending on the size of your company and the type of subcontractor. For small and medium-sized enterprises (SMEs), subcontractor costs are generally eligible, for larger companies there may be restrictions.
4. Consumable items
Materials and resources used or transformed during R&D processes, such as chemicals, prototypes and components are qualifying expenses. But items sold on are excluded.
5. Software
Software licences required for R&D projects are eligible. This includes off-the-shelf software and bespoke software developed specifically for your R&D activities.
6. Data and cloud computing costsExpenses related to data acquisition and cloud services used for R&D activities are qualifying costs. This includes costs for data storage, processing and analysis services used in your R&D projects.
7. Payments to clinical trial volunteers
For companies running clinical trials, payments made to volunteers participating in R&D studies are eligible expenses.
8. Contributions to independent research
Financial contributions to independent research bodies, such as universities or research organisations, are eligible if the research is relevant to your company’s trade.
Accurate record keeping and knowledge of eligible costs is key to successful tax credit claims.
Recent Changes to R&D Tax Relief
Make sure you are up to date with recent changes to R&D tax relief regulations to stay compliant and maximise your claim:
- Merged scheme introduction
For accounting periods starting on or after 1 April 2024 the UK government has introduced a merged scheme, combining the SME and Research and Development Expenditure Credit (RDEC) schemes. This one scheme aims to simplify the R&D tax relief process.
- Enhanced R&D intensive support (ERIS)
Loss making SMEs with qualifying R&D expenditure of 30% or more of their total expenditure are eligible for enhanced support. This enhancement provides a payable tax credit of up to 14.5% of the surrenderable loss, it’s a big benefit for R&D focused businesses. To get this support your company tax return must accurately reflect your R&D expenditure.
Software Costs
Software costs are often underclaimed because of the uncertainty around their eligibility. Many businesses use specialist software for design, testing or data analysis which is eligible for R&D tax relief. Whether it’s a paid subscription to a cloud based platform that facilitates development work or a bespoke system developed to support a research project, these costs should be claimed. However general software used for administrative purposes, such as standard office applications, does not qualify.
Travel Expenses
Travel expenses related to R&D projects can be claimed but there are limits. If an employee needs to visit a testing facility, research site or collaborate with an external partner directly involved in the development process then some travel costs may be eligible. However routine business travel or general commuting expenses will not qualify. The key test is whether the travel was essential to the R&D process and directly contributed to the project.
Subcontracted R&D Costs
Understanding how subcontracted R&D costs are treated is important when making a claim. Many businesses work with external specialists or third party research teams to develop innovative solutions. In these cases costs associated with subcontracting can be claimed but the percentage that qualifies depends on the company size and the scheme being used. For SMEs a significant proportion of subcontractor costs can be claimed whereas large businesses making claims under the Research and Development Expenditure Credit (RDEC) scheme face stricter limits. Ensuring that contracts with external providers clearly define the scope of R&D work is critical in supporting a claim. Data is also becoming more prominent in modern research and development. With the growth of digital tools and machine learning technologies businesses are investing more in data acquisition and computational power to drive innovation. HMRC has updated its guidelines to include costs associated with data and cloud computing where they contribute to R&D work. This could include costs of acquiring datasets used in AI training models, complex simulations or running high powered computing processes that support scientific advancements.
For businesses undertaking R&D projects that require laboratory space, prototype development or materials testing the costs of hiring specialist facilities or leasing research equipment may also be eligible. While capital expenditure on equipment itself does not fall under R&D tax relief certain associated costs such as hiring, maintenance and consumables used in testing phases can be claimed.
R&D Documentation
Another aspect to consider is the documentation required to support an R&D tax relief claim. Many businesses underestimate the level of evidence needed, assuming a project description alone will suffice. In reality detailed financial records, technical justifications and explanations of how a project sought to resolve scientific or technological uncertainty are vital. Companies should aim to keep logs of R&D activities, breakdowns of employee time spent on qualifying work and clear records of expenditure. This not only supports the claim but also ensures any future HMRC enquiries can be handled efficiently.
Looking Ahead
Looking forward with closer scrutiny on R&D tax relief claims businesses should be prepared for additional compliance checks. HMRC has introduced stricter reporting requirements particularly for first time claimants and those making large claims. Providing clear and well documented submissions will help businesses avoid delays or challenges. Understanding the nuances of a tax credit claim will help businesses get the most from their R&D tax relief.
Compliance and Maximising your Claim
To make the most of your R&D tax relief:
Keep Records
Detailed records of R&D activities and costs are key. This includes timesheets, project notes and financial records. Accurate records for tax purposes and to support your R&D tax relief claim.
Consult Experts
Working with R&D tax specialists can help identify all qualifying activities and expenses, ensure a full claim. Experts can help identify all qualifying activities and expenses, ensure you get the most from R&D tax credits.
Stay Up to Date
Regularly review HMRC guidance and updates to stay compliant with current rules and benefit from new incentives. Getting the most from your R&D claim costs can make a big difference to your business. By reviewing your projects and keeping detailed records you can get the most from R&D tax relief. Getting the most from your R&D tax credit can make a big difference to your business. Understanding the R&D tax credit impact on your UK corporation tax can help with your financial planning. At Plus Accounting we guide companies through the R&D tax claim process to ensure you get what you’re owed.
We’ll support your innovation and help your business grow.
Here are some useful links
R&D Blog Series
There will be several blogs in this R&D series:
- What is the difference between an SME and large company for R&D tax relief?
- How important is the R&D summary?
Disclaimer – Please be aware that the information provided in this article only applies up to 31 March 2023.
Author: Helen Griffiths, Accounts and Audit Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site