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What Expenses Can I Claim for Research and Development?

How to Uncover All Qualifying R&D Expenditure for Your Organisation.

If you work in Research and Development, you may be able to claim back up to 33.35% of your expenditure as a cash credit or tax reduction.

R&D tax incentives are government schemes aimed at encouraging innovation and advancements in various industries. These incentives serve to reduce the financial burden of R&D investments, making it more attractive for companies to invest in innovation.

These are fantastic ways for businesses to increase their cash flow, therefore it is essential to ensure that you understand what you are eligible to claim for, and how to optimise these claims. This blog aims to cover what counts as qualifying R&D expenditure, and how to best optimise your claim.

What counts as research and development qualifying costs?

You can claim tax relief on some of the costs that your business incurs from the start to the end of the project. The R&D element begins at the point the project starts to resolve the scientific or technological uncertainty and finishes when said uncertainty is resolved or the work to resolve it comes to an end.
The following information will tell you which costs you can claim for.

Staff costs associated with research and development

For any PAYE employees who were involved in a research and development project, (involving those who were hands-on in completing the R&D work, and those managing and supervising them), you can claim their:

-Employer National Insurance contributions
-Employer pension contributions
-Travel costs

Materials that are consumed or transformed in your R&D process

You can also claim R&D tax credit on consumable items. These are items that are directly used, consumed or transformed for the purpose of research and development. Often, this can include things like:

-Materials directly used in the R&D process
-Chemicals and other substances used in the R&D process

HMRC understand that it can be difficult to separate things like water bills into R&D related, and non R&D related, therefore HMRC claim to adopt a pragmatic approach to this type of expenditure on indirect activities.

Software involved in Research and Development

Companies can claim specific software costs directly related to their Research and Development (R&D) activities.

The following types of businesses can claim for software research and development tax credits:

-3D modelling specialists
-Technical consultancy
-App development
-Software product development
-Legal service providers
-Education social enterprises
-Recruitment agencies
-Financial institutions
-Retail and e-commerce
-Tech-enabled businesses
-Payment solution providers

To be eligible for the credit, the software should play a direct role in the R&D process and contribute significantly to the scientific or technological progress aimed for in the project. This can involve the following:

Software Licenses.
The costs associated with purchasing or licensing software specifically used for R&D purposes are eligible. This includes any subscription fees or one-time purchases necessary for the R&D project.
Development and Integration Costs.
Expenditures involved in creating or customizing software solutions for R&D activities can be claimed. Whether it’s developing proprietary software or integrating existing tools for specific R&D needs, the associated costs count.
Cloud Computing Costs.
If a company uses cloud-based platforms or services for R&D purposes, such as for data storage, processing, or testing, the related expenses can be eligible for R&D tax credits.
Maintenance and Support Costs.
Ongoing maintenance, updates, and support for software directly linked to R&D projects are claimable. This includes expenses to keep the software up-to-date and functioning optimally during the R&D process.
Prototyping Software Costs.
Software used for creating prototypes or models as part of the R&D process can also be claimed. This includes simulation software, design tools, and other applications facilitating the prototype development.
Testing Software Costs.
Expenses associated with software utilized for testing, validation, or quality control within the R&D phase can be included in the claim.

Multipurpose software or tools like office or project management software are not qualified for the credit unless they’ve been adapted or tailored for the specific R&D project.

Subcontracting Research and Development costs

Under the SME scheme (for small and medium-sized enterprises), you can claim up to 65% of the relevant R&D costs made to subcontractors, so long as the two companies are not connected. This means controlled by the same shareholders.

If however the subcontractor is connected, then the company will claim for the lesser of 100% of the R&D payment made to the subcontractor and the relevant expenditure in the connected party’s accounts.

The company can claim R&D tax relief on the lower of:

1. Eligible Expenditure of the Contractor: This refers to the costs that the subcontractor incurred directly for the R&D activities. These costs could include labour, materials, and other expenses directly related to the R&D project. Or,

2. R&D Payment Made to the Subcontractor: This is the actual payment made by the company engaging the subcontractor for the R&D work performed. It’s the amount paid to the subcontractor for their services related to the R&D project.

Larger companies claiming under the RDEC scheme cannot claim R&D Tax Relief for development work that is subcontracted to limited companies. However, there are exceptions whereby 100% of eligible spending can be claimed as long as the subcontractors are individuals, a partnership where each member is an individual or a qualifying body

They can claim back any work that is directly undertaken by the following:

an individual
a partnership of individuals
a charity
a higher education institute
a scientific research organisation
a health service body

UK businesses can no longer claim tax credit for R&D activities that took place abroad.

Externally Provided Workers (EWPs)

These are temporary workers who were sourced from an external agency. You can claim 65% of the cost of the fee paid to the agency.

You can, however, claim 100% if you and the external agency are connected (owned by the same shareholders). This means that you can claim either the fee paid to the agency or the cost of labour to the staff provider. Whichever has the lowest amount is the one that you can use for your R&D tax credit claim.

It is important to note that EPWs are different from subcontractors, and therefore require a different type of claim.

Clinical trial volunteers

This cost category typically features in the healthcare, biotechnology and pharmaceutical industries, where companies pay people who are involved in clinical trials to test the efficiency of drugs as part of an eligible R&D project. Some of the following costs may be eligible for R&D tax credits:

-Costs related to planning and conducting the trial
-Medical equipment and supplies that were used
-Patient recruitment costs
-Result analysis and reporting costs

Some of the following costs from clinical trials are not eligible for R&D tax credits:

-Marketing costs
-Sales costs
-Costs from trials that were not associated with improving the performance or effectiveness of a product
-Costs from trials that were not conducted in compliance with relevant regulations and guidelines

Pure Mathematics

Since April 1st 2023, the Government has extended the eligibility criteria to cover pure mathematics. By definition, pure mathematics has no application outside of the world of mathematics, and focuses on abstract theories.

The fact that pure mathematics is now included makes it easier to process your claim, as it means that you do not need to distinguish and separate any costs related to pure mathematics from other applied mathematics-related R&D activities.

All you will need to do is to make sure that your R&D activities are making an advancement in mathematics, and that you have met the other eligibility criteria.

Act Now to Optimise Your Research and Development Expenditure Credit

Before submitting an R&D tax credit claim, it is recommended that you get advice from an R&D tax specialist who can help you prepare the claim.

Furthermore, since HMRC can take months to pay out your tax relief claim, there is the option to take out a short-term R&D tax credit loan to speed up the release of funds. This type of debt financing enables you to get access to the capital you need up to 6 months in advance of your year-end