R&D Tax Relief is a government-led tax incentive for UK businesses conducting innovation. Any business bringing a new product, process, or service to market (or enhancing existing ones) can access this scheme by filing an R&D Tax Credit claim to HMRC every fiscal year.
R&D Tax Credits allow claimants to recover up to 27% of the money they've spent on qualifying R&D expenditure, either in cash or in the form of a Corporation Tax (CT) deduction.*
How beneficial could R&D Tax Relief be for your business? And how much could an R & D claim contribute to your cashflow?
That depends on a few factors, namely – how much money you’ve spent on areas that HMRC class as ‘qualifying R&D expenditure’.
Categories of qualifying R&D expenditure for the purpose of R&D Tax Relief are as follows:
Externally Provided Workers (EPWs)
Payments to the subject of clinical trials
In this blog, we’re going to be focusing on the first area of qualifying R & D claim expenditure – Staffing. We’ll break down the specific inclusions of this spending category to help you assess the scope of your potential R & D claim.
Gross Salaries can be included in your R & D claim
For businesses filing R&D Tax Credits under both the SME and RDEC schemes, costs incurred on gross salaries can be included in the R & D claim. An employee’s gross salary is how much money they earn from their job before any tax deductions or mandatory contributions are removed.
Gross salary includes the payment of basic wages, as well as overtime pay and bonuses – so this category can amount to a great deal of claimable expenditure when it comes to R&D Tax Relief.
Employer NI Contributions can be included in your R & D claim
Employers pay National Insurance (NI) contributions on their employees' earnings and benefits. They are responsible for collecting Class 1 National Insurance contributions and income tax deductions from their staff through the PAYE system. These costs can be re-invested into the business through filing an R&D Tax Credit claim.
Employer Pension Contributions can be included in your R & D claim
Employers are required to deduct contributions from their employees’ salaries and pay these over to a pension scheme. Failing to contribute to your employees’ pension scheme accurately or on time could result in a fine from The Pensions Regulator (TPR). Costs incurred through pension contributions qualify for R&D Tax Relief and can therefore be included in your R&D Tax Credit claim.
The rules around reimbursed business expenses
For the purpose of making an R&D Tax Credit claim, benefits such as private medical insurance or leasing company vehicles are specifically excluded from the category of qualifying staffing expenditure.
However, certain reimbursed staff expenses can be included in your R&D Tax Credit claim. The simplified framework for separating claimable expenses from non-claimable expenses is as follows:
Was ꭓ originally a staff cost (paid on an employees personal card)?
Was ꭓ then reimbursed as a business expense?
Was ꭓ directly related to advancing the R&D project?
If the answer to each of these is yes, then you’ll be able to include said cost in your R&D Tax Credit claim. Remember, if the expense was initially paid by the business, it wouldn’t count under qualifying staffing expenses.
Typically, these types of expenses reported in an R&D Tax Credit claim relate to travel and subsistence. Let’s run through an example:
Mark is the R&D Director for an engineering company that recently opened a factory in the US. Mark spends £1,000 flying to Los Angeles to oversee new R&D-intensive product development trials. Provided that Mark initially purchased the flights using his personal credit card, rather than a company credit card, then they would qualify as an allowable staffing cost in their R & D claim. When the cost of the flight was reimbursed to Mark, it became an expense, and allowed him to perform the duties directly involved in carrying out their research and development. Therefore, every condition is met in the above framework, and this spend constitutes qualifying R&D expenditure!
Importantly, you cannot include director dividends in an R&D Tax Credit claim.
This can impact the size of your R&D Tax Credit claim significantly, provided that your directors are involved in the R&D activity to some extent.
Some employees or directors may devote 100% of their time to R&D activities within a company, but often, the team will be only partly engaged in R&D activities.
In this case, the party making the R&D Tax Credit claim must determine the appropriate apportionment of their total staffing costs to include in the financial report. These complexities are where using an R&D Tax Credits Specialist becomes crucial!
We’ve now covered the different subcategories that comprise ‘staffing’ within qualifying R&D expenditure. Hopefully, this detail gives you a better understanding of the costs that can be included on your R & D claim – but remember – this is just one of the six areas of claimable spending!
Putting an R&D Tax Credit report together requires meticulous detail and rigorous financial analysis, which is why businesses should never attempt to submit an R & D claim alone. Just one or two minor mistakes can trigger a lengthy HMRC enquiry and even result in financial penalties.
Using an R&D Tax Credits Specialist, such as Claim Capital, is the best option for ensuring water-tight compliance and securing the maximum R&D Tax Relief benefit from HMRC.
It also allows teams to offload the entirety of the R&D Tax Credit claim process and stay focused on what matters most – innovation!
To find out whether you’re eligible to claim R&D Tax Relief, or to learn more about our fixed fee service, get in touch with our team of diligent R&D Tax Advisors.
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.