What costs qualify as R&D?
There are two categories of activity that will give rise to qualifying costs and we explain both below.
Research and development tax credit cashback amounts are worked out based on how much your qualifying activities cost you in the relevant accounting year - we generally refer to these as Your Costs.
The two categories of qualifying activity are:
- Activities which directly contribute to R&D
- Qualifying indirect activities.
There are slightly different rules for Large Companies and SMEs (Small and Medium Enterprises). This page relates to the regulations for SMEs doing R&D. (SMEs are companies with under 500 employees and they must also have either less than 100m Euros turnover or less than 86m Euros on their balance sheet in the relevant accounting year. It's Euros because R&D tax credits are subject to European regulations. You just need to do the conversion from Pounds to Euros to do the check.)
Activities which directly contribute to R&D are things like:
- Adapting software, materials or equipment to support the R&D;
- Planning activities that are associated with scientific or technological aspects of the projects;
- Design, testing and analysis undertaken to resolve scientific or technological uncertainty;
- Complex technology hardware and software system and application development
- Creation of physical prototypes e.g. for new gadgets, fittings, parts, etc;
- Carrying out manufacturing trials.
Qualifying indirect activities can only be costed if done by your employees – they include:
- Scientific and technical information services (such as writing a report on the R&D findings);
- Ancillary activities essential to undertaking the R&D (e.g. project management, including time spent in taking on and paying staff, finding and arranging the leasing of laboratories and maintaining equipment including computers used for R&D purposes);
- Training required to directly support R&D projects;
- Research by students and researchers carried out at universities;
- Research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods, where this research is not R&D in its own right;
- Feasibility studies to inform the strategic direction of a specific R&D activity.
The headings used to work out Your Costs are restricted to:
- Employee wages
- Third parties/contractors and agency staff
- Software licenses (specific to carrying out R&D)
- Consumables (energy, power, wasted materials)
- Payments to subjects of clinical trials
- Staff travel and subsistence (but only where the employee paid the cost using their own card or cash and was reimbursed).
This includes all costs for staff carrying out direct or indirect R&D activities. It includes gross salaries + employer NI payments + employer pension contributions – e.g. if you have someone working 50% of their time on R&D 50% of their salary costs can be counted towards your costs.
Contractors and agency staff
This covers any R&D related costs of employing agency staff or using third parties/contractors to undertake direct R&D activities. The relevant costs can be counted at 65% of the amount invoiced to your company in respect of the R&D activities. It does not matter whether the supplier is based in the UK or abroad.
If your R&D involves using up items such as materials or products in building prototypes or doing manufacturing trials, or you use up consumables that are transformed and therefore no longer of value, including gas, electricity and water – the costs of these items can all be included in your costs at 100% of the purchase price.
Are you ready to find out if you qualify or how much your R&D claims could be worth?