There are strict guidelines regarding the type of costs that can be included within your company’s R&D tax claim and the categories are described below.
The key consideration when making an R&D claim is to thoroughly review all of the costs incurred, regardless of whether the connection to your R&D activity is obvious or not. As you will see below, there is scope to include some indirectly related R&D costs that might otherwise be ignored.
We would recommend seeking professional advice when making a claim or ensuring that you refer to the BEIS guidelines which provide thorough detail on how to make R&D claims and detailed guidance on the types of costs which can be included.
Can staff costs be included in my R&D claim?
The costs relating to staff directly engaged in an R&D project can be included in a claim and include:
- Employers’ national insurance contribution and
- Employers’ pension contributions
The cost of benefits in kind and associated national insurance contributions are excluded.
It is possible to include the costs of staff who provide technical support, plan and organise the research too, but staff providing general support, such as administrative tasks will normally be excluded.
Costs can be apportioned for staff who do not work full-time in an R&D project.
Can the cost of subcontractors be included in my R&D claim?
Subcontractor costs are generally excluded from a claim because they are not employees, but there may be scope to include 65% of their cost as part of R&D costs, which are contracted out.
(Note that the RDEC rules for subcontractor costs is different to the SME scheme).
How are materials and consumables accounted for in my R&D claim?
The cost of materials used directly in the R&D project can be included in a claim and this also includes water, fuel, power etc. You will have to work out a proportion to attribute to the R&D project.
Where materials and consumables are used partly for R&D and non-R&D, you can again apportion the costs when making a claim.
Prototype costs can be included in an R&D claim, but once the prototype has been satisfactorily tested any work to the prototype will no longer be R&D and hence further costs cannot be claimed.
Can the cost of software be included in my R&D claim?
Software costs where the software is used directly in an R&D project can be claimed and it may be possible to include a proportion of software costs for indirect activities, such as time recording software, which may be used for both R&D and non-R&D purposes.
Can the cost of Externally Provided Workers (EPW) be included in my R&D claim?
An EPW is where the company is paying someone else for the provision of a worker, such as an agency or a personal service company. As long as the following conditions are met, 65% of the costs can be included in an R&D claim:
- Worker must be an individual
- Worker must not be a director or employee of the company
- Worker must personally provide their services to the company
- Worker is directed by the company regarding their work
- Worker is provided through a staff provider in accordance with the agreement between the company and staff provider
Are there any other costs worth considering for my R&D claim?
It is also worth considering other costs that might not obviously be R&D to include in a claim, such as:
- Training that is specifically related to the R&D project
- Research which could be research carried out, or collecting data, surveying etc
- Finance activities that may be apportioned partly to R&D
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.
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