What Can I Include in My Claim?
In our previous article we looked at how to tell if your activities qualify for R&D tax credits. In this article we take a look at the types of expenses which can be included in your claim.
A Small or Medium size company (SME) could receive up to 33.3p for every £1 of qualifying R&D expenditure. A large Company could claim up to 9.7p for every £1 of qualifying R&D expenditure.
What Do We Mean by ‘Qualifying Expenditure’?
There are 6 categories of expenditure which may be included in a claim. These are mostly the same for SME claims and large company claims (with some small differences).
Payroll Costs
Included within this category are employees remunerated via the operation of a payroll. This may include the following expenses:
- Gross wage or salary
- Employers national insurance contributions (NICs)
- Employers pension contributions
- Reimbursed employee travel expenses
There are several issues to watch out for when calculating the qualifying payroll costs, some of which include:
- Any accrued bonuses to account for?
- Any employer NIC rebates?
- Any employer pension contributions unpaid at the year end?
- Any employee travel expenses paid directly by the company rather than being reimbursed?
All of the above can materially impact the amount of payroll expenses which can be included within your claim. It is important that these are accounted for correctly to ensure your claim is prepared properly, as incorrectly prepared claims often fail and in worst cases can attract penalties.
Externally Provided Workers
Broadly speaking, this category relates to agency staff supplied by a staff providing organisation.
The external worker needs to have been actively engaged in working on the project. If they were also working on non-qualifying activities, then an appropriate percentage can be taken.
It is important to note that only 65% of the cost may be included within the claim.
As above, there are several issues to watch out for, some of which include:
- Does the expenditure meet the 7 conditions laid out in the legislation?
- Is the external staff provider connected to the claimant company (or has elected to be treated as such)?
As above it is important that these are accounted for to ensure your claim is properly prepared.
Subcontracted R&D Activities
Broadly speaking, subcontracted work on an R&D project is where you engage another company, individual, or partnership to carry out R&D activity on your behalf in exchange for payment.
The work they undertake for you need not be R&D when looked at in isolation, e.g. a testing procedure may be routine for the subcontractor but a necessary task in the overall R&D project being undertaken by your company.
For SME claims, you can only include 65% of the qualifying subcontractor expenditure identified. Large company claims can include 100%, but only if the subcontractor is an individual, partnership or qualifying body and not a limited company.
Several issues to watch out for include:
- Is the subcontractor a limited company? (important for large company claims only)
- Is the subcontractor connected to the claimant company (or has elected to be treated as such)?
Consumables
Included within this category are the following expenses:
- The cost of raw materials which have been used up during or transformed by the R&D activities.
- The cost of electricity used in R&D activities.
- The cost of gas or oil used in R&D activities.
- The cost of water used in R&D activities.
It may be that you cannot account for these expenses exactly. In this case reasonable estimates may be used.
Some important points to consider when collating this information include:
- Has any of the raw materials been reused or recycled into a form or finished product which can be sold onto a third party?
- Do the expenses only include the cost of the raw materials themselves and do not include an element of overheads?
Software
If you have purchased software to undertake R&D activities, then it is possible to include the cost within your claim.
If the packages are used for both R&D and non-R&D purposes, then an appropriate percentage may be used.
Issues to watch out for include:
- The cost must be revenue in nature and not capitalised to tangible fixed assets on your balance sheet.
Payments to Clinical Trial Volunteers
This cost category typically only features in pharmaceutical industry claims. Where companies pay people who are involved in clinical trials to test the efficiency of drugs. This expenditure may be included in the claim.
Summary
The above categories represent all the expenses that may be included in an R&D tax credit claim. Any costs incurred outside these categories cannot be claimed. For example premises rental costs or equipment hire cannot be claimed.
To be claimable, all the above costs must be included within the company’s profit and loss account for the period to which the claim relates (or capitalised to intangible fixed assets on the balance sheet).
There are specific rules surrounding each category and we would strongly recommend speaking to a chartered R&D tax credit specialist to help with this as it can get quite complicated, especially as HMRC can and do charge penalties for incorrectly prepared claims.
