R & D Tax Credit: Which Costs Can Be Claimed?

Research and development tax relief is designed to support companies that work to bring innovative projects under science and technology. The research and development tax credit (RDEC) can…
by Rahul Chapagain
June 21, 2023
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Research and development tax relief is designed to support companies that work to bring innovative projects under science and technology. The research and development tax credit (RDEC) can be claimed by large companies and small and medium-sized companies (SMEs).

Depending on your company’s financial situation, some or all of the expenditure credit can be used to settle the company’s tax liability. The expenditure credit can also be used to settle other tax liabilities the company is liable for and also lead to a payment of credit to your company. From 1 April 2023, the expenditure credit is calculated as a percentage of the qualifying R&D expenditure.

Small and Medium-sized enterprise R&D tax relief

SMEs with less than 500 staff can make claims.

SMEs with a turnover of under 100 million euros or a balance sheet total of under 86 million euros can make a claim for R&D tax relief.

Large Companies

Large companies can claim expenditure which is given as R&D expenditure credit (RDEC). Claims must be made in the company’s tax return or in an amendment to the return. The claim must be made within two years from the end of the relevant accounting period. The company receives a credit against its tax liability of the same amount. The RDEC is equal to 20% of the company’s qualifying R&D expenditure.

Which Cost Qualify?

R&D starts when work begins to resolve the scientific or technological uncertainty and ends when the uncertainty is resolved, or the work to resolve is stopped. The cost incurred on fuel, materials, power and water currently in use can be claimed on these consumable items. However, the same relief cannot be claimed if one sells or transfers ownership of these consumable items.

Pharmaceutical industries can claim payments made to volunteers involved in clinical trials.

For Data License and cloud computing, qualifying expenditures are extended to include data license costs and cloud computing costs, while cloud computing shall include, data storage, hardware facilities, operating systems, and software platforms.

Externally Provided Workers Cost

Workers supplied by a staff provider such as an employment agency, are classed as externally provided workers. They can claim 100% of the relevant payment if the company and the staff providers are connected. A 65% relief can be claimed for the relevant payments made to the staff provider, which is not connected to the company.

In the case of unconnected subcontractors, 65% of expenditure paid to the staff providers for the supply of externally provided workers is potentially eligible to be treated as qualifying expenditure.

Staff Costs

The following relief can be claimed for costs incurred by staff working directly on R&D projects. The salaries of staff, applicable wages, pension fund contributions and any secondary Class 1 National Insurance contributions paid by the company.

Claims can also be made for administrative or support staff who work to directly support a project. However, claims for exemption cannot be made for distributed bonuses, redundancy payments, staff costs for clerical or maintenance work that would have been done anyway, like managing payroll.

Software

Claims can be made for software licence fees for R&D and a reasonable share of the cost for software partly used in the R&D activity.

Subcontractors’ costs

Subcontracted expenditure cannot be claimed unless it’s directly undertaken by, a qualifying body like a charity, higher education institute, scientific research organisation or health service body. An individual or firm where each member is an individual.

SMEs that subcontract qualifying R&D activities can claim tax relief on as much as 65% of the payment to the subcontractor. The subcontractor may not be a UK resident and there is no requirement for the subcontracted R&D to be performed in the UK.

The Following Costs also Cannot Qualify as Eligible Claims.

Expenses incurred in the production and distribution of goods and services, any capital expenditure, the cost of land, the cost of patents and trademarks and rent or rates.                                                        

SMEs with trading losses can surrender part of such loss to the government in return for a tax refund. The surrender can be either all or part of the loss. Such a surrenderable amount should be the lower of the unrelieved trading loss and 186% of the qualifying R&D expenditure.

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