Which types of expenditure qualify for R&D tax relief? Let’s start with what is R&D so we are all on the same page…the key is to think of the tax relief as an incentive for ‘IDEAS’ that you come up with to improve business efficiency, create new products and services, improve profitability or overcome problems and challenges. Every business, no matter what industry you are in creates ideas it is no longer just available to those who are developing cutting edge innovation.
To give you a flavour of how many different industries qualify for R&D tax relief, here’s examples if R&D claims we have completed for clients:
Construction Companies using innovative building methods to solve unique problems due to the site, property or locations, as well as techniques to improve energy efficiency. Tax Saving £171.2k.
A London based beer brewery company is constantly evolving and updating its own-brand recipes with tweaks, trials and experimental brews. Tax saving of £32k.
A large dairy secured R&D tax relief on costs incurred researching and testing how to extend the shelf life of their products. Tax saving of £20k.
An Electrical Contracting company developing new techniques and bespoke solutions to overcome problems encountered on project installations and designing innovative installations with new technology. Tax Saving of £62.6k.
After reviewing your activity, you are satisfied that it is R&D, not you need to ask yourself ‘How can I best demonstrate this to HMRC?’ Based on HMRC’s published guidance, HMRC may expect the company to provide planning documents setting out, for example, why the project was thought to be necessary; what it was hoped to achieve and how it was to be carried out. HMRC state: ‘there is a difference between making an unexpected discovery and the carrying out of R&D. For there to be R&D there needs to be a systematic project seeking to achieve an advance in science or technology’.
That said, HMRC recognise that there will be some small companies, particularly start-ups, which will not conduct their R&D in a ‘structured’ manner. However, it is clear that a company which is able to demonstrate that a project was planned will be in a better position when it comes to claiming R&D relief. This is when you need a tax specialist to create the requested documents and ensure it is structured in the correct manner HMRC requires.
So what types of expenditure qualify for R&D tax relief?
Staff costs:
earnings consisting of money paid by the company to a director or employee of the company which is paid because of the director’s or employee’s employment. Note that this does not include dividends paid to a director shareholder;
- an amount paid by the company to a director or employee of the company in order to reimburse them for expenses paid by the director or employee where that amount is paid because of the director’s or employee’s employment;
- secondary Class 1 NICs paid by the company and compulsory contributions paid by the company in respect of benefits for directors or employees of the company under the social security legislation of an EEA State or Switzerland; and
- contributions paid by the company to a pension fund operated by the company for the benefit of its directors or employees.
The staffing costs must be attributable to the R&D. In this way, qualifying expenditure is restricted to:
- staffing costs in respect of directors and employees who are wholly ‘directly and actively engaged’ in the R&D; and
- the appropriate proportion of staffing costs in respect of persons only partly directly and actively engaged in the R&D.
Software and consumable items:
Qualifying expenditure includes expenditure on computer software which is employed directly in R&D. Software employed in the provision of support services, such as secretarial or administrative services, is not employed directly in relevant R&D and so does not qualify for R&D tax reliefs.
Consumable items are ‘consumable or transformable materials’ including water, fuel and power. HMRC guidance is that consumable items are items which are ‘used by the R&D and are no longer so useable in their original form, because they are finished up, or transformed’. This is illustrated by HMRC as follows:
HMRC example of qualifying consumable expenditure
“A good example of a consumable item would be a laboratory chemical used in the R&D process which is used up in the R&D process, or converted to an unusable product. In this context HMRC officers would not seek to exclude expenditure on chemicals where it is economical (or environmentally necessary) to recycle them, so long as they were initially consumed or transformed.
Another example might be of electronic components that are integrated into a larger assembly in such a way that they are effectively transformed into part of a larger prototype, and are no longer available for use for other purposes.”
Externally provided workers:
This type of expenditure is intended to provide relief for payments made by a company to a staff provider in respect of the supply of workers to the company by or through the staff provider.
For the purposes of R&D tax relief, a person is an externally-provided worker in respect of a company if all of the following conditions are met:
- the worker is an individual;
- the worker is not a director or employee of the company;
- the worker personally provides, or is under an obligation to provide, services to the company;
- the worker is subject to (or to the right of) supervision, direction or control by the company as to the manner in which those services are provided;
- the worker’s services are supplied through a staff provider (whether or not the worker is a director or employee of the staff provider or any other person);
- the worker provides, or is under an obligation to provide, those services personally to the company under the terms of a contract between the worker and a person other than the company (the ‘staff controller’); and
- the provision of those services does not constitute the carrying on of activities contracted out by the company.
Expenditure on an externally provided worker is qualifying expenditure where the worker is directly and actively engaged in the R&D. Where a worker is only partly directly and actively engaged in the R&D, only the appropriate proportion of the expenditure is attributable to relevant R&D.
How we can help you.
As experienced, qualified accountants and tax specialists, we deal with the subtleties of tax day-in, day-out. Our detailed understanding of the system means we can keep your tax liability to a minimum while playing strictly by the rules.
Every claim is managed by an experienced consultant who advises you on the entire process.
Our specialists are confident in the work they undertake, which is why we are happy to carry out a review and you only pay us based on the benefits and the tax we save.
How much does it cost?
We can work on a fixed price fee for the claim, or a percentage of the tax savings achieved, depending on your preference. A 5 minute phone call will usually enable us to give a good indication of whether a claim might work for your business, before we start getting into the detailed work or agreeing the basis on which we are paid. There is nothing to lose by making a claim.
For more information visit our Research & Development Tax page.
Why Your Tax Partners and Mark Holt & Co?
Your Tax Partners are part of the Mark Holt & Co Group who offers a wide range of services and expertise through our specialist divisions.
Every claim is managed by an experienced consultant who advises you on the entire process.
Over £3,500,000+ total claimed by our team.
Give us a call on 01752 220979 for an informal chat with our Tax Specialists and find out if you have a R&D Claim.
To see an example of how we helped a client claim R&D Tax, take a look at the case study below.
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