Are you in the process of completing a company tax return? Then you may be looking to determine which R&D costs you may be able to claim for to receive a helpful corporation tax reduction.
Whether the company you are responsible for is currently conducting research and development activities or has carried out development work in the past two years, a basic understanding of eligible R&D costs can help you to gauge the amount that you might receive back for R&D tax relief.
So, whichever industry you operate in, if the company has conducted development projects, you can’t afford to miss out on recouping eligible costs through the R&D tax credit incentive.
Eligible Costs for R&D Tax Claims
If a recent development project conducted contributes directly to seeking the advance in science or technology according to the supporting guidelines and legislation1, then you will be able to claim tax relief on expenditure as listed below. If you’re unsure if a project or previous activities qualify, then you can find out by contacting our specialist R&D tax expert here.
R&D costs that can be claimed for include:
Direct labour costs for those undertaking R&D work
The costs associated with directly employing someone to undertake R&D activities can be included in your R&D tax claim. This includes salaries, employers NI, pension contributions and bonuses. If an employee’s time was split between their normal role and R&D activities, then only the proportion spent on R&D can be claimed.
External staff hire to work on R&D activities
If individual externally provided workers (not companies) are hired to work on the R&D project, then a proportion of salary expenditure can be claimed. This is less than for permanent staff as HMRC assume that the payments to EPWs include a profit element. This profit element must be excluded.
Subcontracted costs for employing an agency or freelancers
If eligible activities on the project have been carried out by a subcontractor or an external agency, then again, it may be possible to claim relief on a proportion of the eligible costs for these sub-contracts.
The eligible costs allowable for subcontracted work is dependent upon the size of your organisation, the kind of subcontractor used and the nature of the contract between the parties. Special rules apply, so in this instance it’s essential to consult a professional R&D tax advisor.
Consumable or transformable materials used for R&D projects
As the R&D project progresses, materials are consumed within the testing process and prototype development. The cost of these materials may be claimed, particularly if the prototypes are scrapped and not sold. Materials embodied in a finished product, or production tooling, following R&D activities cannot be included in the R&D tax claim.
There are also additional transformable material costs that can be included in R&D claims, including heat, light and power.
Costs for necessary supporting business functions
In addition to the main categories for eligible R&D costs, there are a number of other costs that can be claimed for essential support functions to the R&D project. These include HR, finance, IT and certain software licensing costs and development of special tooling. However, due to the unique nature of each project it’s important to speak to R&D tax specialists to identify all the costs accurately.
How to Make Accurate R&D Tax Claims
Of course, the amount that can be claimed from each of the categories above is entirely dependent upon the nature of the work and the extent to which activities can be considered eligible R&D (under current legislation and supporting guidelines).
That’s why many businesses utilise the expertise of R&D tax specialists who are trained in evaluating R&D projects to extract the optimum value of eligible costs for a business. Relief on these costs is then repaid either as a reduction in corporation tax or a direct payment from HMRC dependent on a number of factors such as the size of the business and whether it is profit or loss making.
Either way, it’s safe to say that relief on the costs for development work conducted will improve the financial standing of a business and help to encourage innovation which drives productivity and performance; making it worth your time to explore what R&D costs you can claim for.
To speak with R&D tax specialists on eligible costs for R&D projects, call R&D Tax North West on 01827 338118 or send an email today.