Which costs qualify for relief and which don’t?

 

R&D – Qualifying Criteria

To get R&D tax relief you need to be able to demonstrate to HMRC how a project:

          - looked for an advance in science and technology
          - had to overcome uncertainty
          - tried to overcome this uncertainty
          - could not be easily worked out by a professional in the field

The project may research or develop a new process, product or service or improve on an
existing one.
The project must aim to create an advance in the overall field, not just for your business.
This means an advance cannot just be an existing technology that has been used for the
first time in your sector.
The process, product or service can still be an advance if it’s been developed by another
company but is not publicly known or available. The key to a successful R&D report is within the Technical Justification, once this has  been written the quantification completes the report

R&D - Which costs qualify for relief (and which don’t)?

Having established that the project(s) the company has undertaken meet the qualifying
criteria for R&D tax relief, as they sought or achieved an advance in science and/or
technology, the next stage is to carefully quantify those costs that qualify for relief.
The most common qualifying costs fall into the following categories:

- Staff Costs
          - Wages or salaries
          - Employers National Insurance Contributions
          - Pension fund contributions
- Subcontractor costs
          - A company can claim 65% of these costs incurred
- Staff providers
          - Like subcontractors a company can claim 65% of the cost of relevant
            payments made to an external agency who provide staff for a specific
            project
- Items consumed
          - Materials
          - Utilities

Other qualifying costs that can be considered when preparing an R&D tax relief claim
include:

- Clinical trial volunteers
          - Specifically, for the pharmaceutical industry
- Software
          - Licence fees for software purchased for R&D

Within all of these areas, careful analysis must be made to establish the proportion of the
costs that directly relate to the qualifying activity, and only the qualifying element may be
claimed.
HMRC will take a realistic view on the proportions claimed, the key being the company
can justify the proportions they have included within the claim.
Whilst HMRC are keen to encourage companies to make the appropriate claims for R&D
tax relief there are specific costs that may be incurred by a company that will not qualify
for R&D relief, these include:

- Dividends
          - where a company director involved in a qualifying project receives a mixed
            income of salary and dividends, only the salary element will qualify for
            relief
- Capital Expenditure
          - Whilst this does not qualify for R&D tax relief, when a capital item, including
            commercial property where a qualifying activity is undertaken, this will be
            relieved at 100% of cost in the year incurred through R&D allowances - part
            of the Capital Allowances regime
- The cost of patents and trademarks
          - this doesn’t affect deductions through the normal accounting process
- Rent or rates at company premises where a qualifying activity is undertaken
- The production & distribution of goods or services

HMRC guidance- link below
https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief 

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