When it comes to capturing costs against a qualifying R&D project, there are many misconceptions about the types of costs that can be included. After all, if a cost is necessary in carrying out the R&D it must surely qualify for the relief, right? Unfortunately, this is not always the case and there are specific rules governing the types of costs that qualify. For your claim to be eligible for R&D tax relief, your costs must fall under one of the following four main headings:
|Staffing Cost||Gross salary, Employer’s NI and Employer’s pension contributions of staff involved in R&D
|Subcontracted R&D||Outsourced R&D carried out by a third party|
|Externally Provided Workers||Outsourced Services (akin to agency staff)|
|Consumable Items||Items ‘consumed’ in the R&D process and not incorporated into a final sold product, e.g materials, prototypes, etc.|
Over the years, companies and agents have lobbied hard for the inclusion of certain essential overheads outside the above categories in the rules, such as rent, rates and patent fees, but HMRC have proved difficult to budge.
Given the above limitations as well as others, what are the opportunities available to claimants to maximize a claim within the boundaries of the rules? Here are some of the less obvious areas, commonly missed by companies.
Reimbursed travel expenses
Many companies incur significant costs attending conferences across the world during their development process. However, when they are incurred directly by a company, travel costs do not sit easily within any of the categories and are inadmissible.
Over the past three years a debate has raged between HMRC and the R&D industry about the situation whereby incurred costs by an employee are recharged to the company, the so called ‘reimbursed expenses’ rules. It is understood that under the tax legislation it forms part of the ‘salary’ of the individual – therefore it would be claimable alongside other forms of reimbursed expenses.
HMRC maintained that in order to qualify, any reimbursed expense had to be normal qualifying R&D expenditure (e.g. materials bought, subcontractors paid, etc.). Until October 2016, HMRC denied any relief for reimbursed travel and subsistence.
HMRC finally stood down from their argument and issued updated guidance to allow travel and subsistence incurred by R&D staff for the purposes of the project in certain circumstances, where the purpose of the travel was beneficial to R&D.
Here is an example of how this can be applied:
Pavel works as an R&D director for a company that carries out qualifying R&D. During January, he attends three meetings. For each meeting, he travels by train and taxi and pays the costs himself, later claiming back the expense from his employer.
7 January Meeting to plan a new research project
12 January Meeting with a colleague to review and finalise a new feasibility study
14 January Quarterly company board meeting
The travel expenses for the first 2 meetings will be allowable staff costs under S1123(3) CTA 2009. The cost of attending the 14 January board meeting will not be an allowable expense.
If companies that didn’t claim historically under the basis of the ‘old’ HMRC guidance have incurred significant costs, there is a facility to go back and change the claim outside the normal two-year limit. This works if the accounting period in which the claim was restricted ended between 9 October 2012 and 31 January 2016, and the original claim for that period was made on or after 9 October 2014. Claims need to be in by 31st January 2018.
If you are not currently paying individually and reimbursing R&D trips, be sure to do so going forward to pick up on valuable relief.
Moreover, time of the ‘hands on’ R&D staff, engineers, software programmers, a frequently overlooked area, is that R&D can be claimed on the costs of those who support the development activities. This could be for those hiring staff who undertake R&D or provide background administrative/logistical support. Below is a full list:
1. scientific and technical information services, insofar as they are conducted for the purpose of R&D support (such as the preparation of the original report of R&D findings);
2. indirect supporting activities such as maintenance, security, administration and clerical activities, and finance and personnel activities, insofar as undertaken for R&D;
3. ancillary activities essential to the undertaking of R&D (e.g. taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for R&D purposes);
4. training required to directly support an R&D project;
5. research by students and researchers carried out at universities;
The principle is that the individuals must be only one-degree removed from those directly undertaking the R&D, i.e. it is not possible to claim on support for further support down the chain. Whilst the level of involvement is often lower on an individual level, where a project requires the input of a large part of the team, the savings can stack up.
Heat, light & Power
A common complaint is that property costs don’t qualify for R&D relief. There is one exception, HMRC accept that utility costs including water, fuel and power of any kind meet the test as a ‘consumable’ item. Therefore, an estimated amount of incoming utilities relating to ‘R&D’ can be claimed. Generally, a distribution method (such as floor space, or R&D hours/Total hours) can be used.
If you purchase equipment for use in R&D, and it is a capital item for ongoing use in the R&D rather than as a consumable, then R&D tax relief isn’t available. Such items are commonly capitalized in the accounts and then there is the potential to look at a separate capital allowance ‘Research and Development’ Allowances (RDA), which give a 100% First Year Allowance. This is after the application of the Annual Investment Allowance—another 100% allowance—so it only becomes valuable once your annual additions exceed £500,000. If you have filed in the past and think there are some areas of underclaim, you still have two years from the accounting period to go back and reassess.
Contact one of our consultants today for a complimentary assessment of your R&D projects and their eligibility for claim:
T: +44 207 388 3290