What costs
can be included in
an R&D claim?
Identifying and calculating the costs for inclusion in your Research & Development (R&D) claim can be a complex and onerous process.
Identifying and calculating the costs for inclusion in your Research & Development (R&D) claim can be a complex and onerous process.
When do costs qualify
for an R&D claim?
For a cost to qualify for inclusion in your R&D claim, it must be:
Incurred in relation to your R&D activities
Paid for by you
Included as an expense on your profit and loss account or intangible fixed asset on your balance sheet
Deductible against taxable profits in your corporation tax return
A qualifying R&D cost category (discussed in further detail below)
Independent
R&D
research
Only the following specific cost categories may be included in your R&D claim:
Staffing
Where an employee or director has been engaged in qualifying R&D activities, an appropriate proportion of the following costs relating to their employment may be included in a claim:
-
Gross salary (including any overtime and cash bonuses) paid through payroll;
-
Pension Contributions made by the employer;
-
Class 1 National Insurance Contributions made by the employer; and
-
Business expenses such as travel and subsistence costs (in specific circumstances only).
The following costs are not allowable for the purposes of your claim:
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Dividends paid to shareholders;
-
Off payroll payments to directors or employees;
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Sales commission and redundancy payments; and
-
Benefits in Kind (e.g. private health insurance and company cars).
Subcontractors
Costs incurred contracting an external party to provide a service in relation to your R&D projects may also be included in your R&D claim.
The rules governing whether and to what extent these costs are included can be complex, with factors such as the following needing to be considered:
-
The type of subcontractor;
-
The nature of the service provided in relation to the R&D project;
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Your relationship to the subcontractor; and
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Whether you are claiming under the SME or RDEC R&D incentive.
Externally Provided
Workers (EPWs)
Externally Provided Workers (EPWs) are individuals provided to your company via an intermediary company, as opposed to contracting directly with your company. Examples include agency staff and freelancers hired through personal services companies. EPWs are not employees, directors or subcontractors.
As a rule of thumb, you can claim up to 65% on the payments made to the external staff provider. Though in certain situations where the EPW is provided via a group company (e.g. a subsidiary) up to 100% of the costs may be included in your claim.
Consumables
Consumables are physical items that have been consumed or transformed during your R&D activities, such that they are no longer usable in their original form once the R&D process has finished.
Common examples include raw materials, chemicals and utilities, such as power, water or fuel. Often consumables included in the claim will take the form of a prototype or prototypes created as part of the iterative design process.
Any consumables which are sold to an end-user cannot be included within a claim.
Payments to the subjects
of clinical trials
This cost category typically only applies where your business is within the pharmaceutical industry. Specifically, where an individual has been paid to participate in a clinical trial which is part of an R&D project you are undertaking, such payments can be included in your R&D claim.
Contribution to
Independent R&D
This category is only available if you are a large company.
Where large companies make a payment for the purposes of funding independent R&D undertaken by an unconnected individual, individuals in partnership, or certain qualifying research organisations, this payment can be included in their R&D claim under the RDEC incentive.