What costs can I include in my R&D tax claim?

Does your company undertake research and development for both new and existing goods and services? Then you can claim back up to 33% of the expenses thanks to the R&D Tax Credits scheme.

The R&D Tax Credits scheme was introduced in 2000 as a government tax incentive for businesses to innovate.

But every R&D project is different, and it’s sometimes challenging to know which expenses are covered.

In this blog, we will check out what costs can be included in R&D claims.

 R&D claims

Table of contents

What costs are covered in the R&D Tax Credit?

1. Consumable items
Consumables are materials used or transformed during the R&D process, like water, fuel, and power. The cost of the materials used or transformed in the R&D process can be included in your claim.

Tax Advisor

Once your work to remove the technological or scientific uncertainty is complete, any further expenditures for consumables (such as materials for marketing or cosmetic tweaking) cannot be accounted for in your claim.

You should be careful to only include the consumable expenses that are related to your R&D activity because these may be different from the consumable costs for the entire developed material, product, service, or process.

2. Staff costs
Paying employees is one of the significant expenses for most businesses, and these expenses will likely increase if you invest in R&D.

If you are working on a new project that is proving difficult, you might decide to hire more workers.

Fortunately, you can claim back some of these expenses using R&D Tax Credits. It includes factors like employers’ NICs, salaries, company pension contributions or even reimbursed expenses.

An R&D team frequently consists of many members from various company departments.

The R&D manager, a lead developer, engineers, project coordinators, CAD engineers, quality control and testing specialists, cost accountants, and members of the senior management group could be on your R&D project team.

Also, expenses for hiring these individuals to complete the R&D project can be claimed as R&D Tax Credits.

3. Prototype
You can often include the expense of designing and building a prototype in the R&D claim. However, the aim of the prototype must be to fix some technological or scientific uncertainty.

If you create the prototype for a commercial event (e.g., as a trade show display), it cannot qualify. Also, if you later sell the prototype to a client, the expense taken to create the prototype cannot qualify as R&D (although there may have been R&D involved in designing the prototype).

4. Research contributions
Research contributions are compensation paid to third-party companies to research on your behalf.

Large corporations can claim these as eligible R&D expenses, but not SMEs. The research must be relevant to the field or scientific quest.

The research must be carried out by a “person or partnership of individuals” or “a qualified body.” A qualifying body would be a charitable organisation, named scientific research body, or a higher education institute.

In most instances, the company must be based in the UK, but HMRC offers a list of some overseas qualifying bodies.

5. Sub-contractors and freelancers
If you delegate some of the development work or employ freelancers, you can also include these expenses in your R&D tax claim.

The subcontractor can be based anywhere in the world, and the freelancer must be actively involved in the project and cannot simply provide expert advice.

For unconnected parties, the invoice amount is limited to 65%. If the party is connected like a subsidiary, then a special ‘look through test’ has to be conducted.

6. Clinical trial volunteers
When pharmaceutical businesses develop a drug, they must receive regulatory authorities’ approval to commercialize it.

The process of approval includes the appraisal of the efficacy and safety of the drug in several clinical trials. Trials involve evaluating the medication in healthy patients and patients with the targeted condition or disease.

Pharmaceutical businesses and contract research institutions will often make payments to individuals volunteering to participate in clinical trials. These expenses can be included in the R&D claim.

7. Software costs
The latest software is a necessity but also an expensive part of R&D.

If you use any software in your developmental projects or project management systems to track your progress, you can claim the software expense through R&D Tax Credits.

Expenses that can’t be claimed

The R&D claim cannot include expenses, not within the categories mentioned above. For instance, you can’t claim for:

  • capital investment
  • the cost of patents and copyrights
  • production and distribution expenses for goods and services

When should R&D Tax Relief be calculated?

R&D tax claims can be submitted up to two years after the end of the financial period in which the expenses were spent.

However, we advise filing the claim as soon as possible following your financial year. Doing so can allow you to pay less corporation tax, or your business could claim a tax credit and get a payment from HMRC.

The timing of the claim will also be affected by the availability of statutory accounts and filing documentation.

Tax Advisor

Final thoughts

HMRC allows certain expenses for the R&D project to be included in the claim.

Any UK business of any size and sector can apply for R&D Tax Credits. The scope of R&D expenses that can be included in the R&D Tax Credits claim is comprehensive.

Therefore, it is recommended to consult with an accountant before getting started with the R&D process.

123Financials Editorial Team
The 123Financials editorial team is composed of seasoned finance and accounting experts with a combined experience of over 20 years. Specializing in UK finance, accounting, and tax-related content, our team is dedicated to delivering insightful and practical advice to startups and small businesses. With a strong background in both the theoretical and practical aspects of financial management, we ensure that our readers stay informed and empowered to make sound financial decisions. Whether it’s navigating the complexities of UK tax laws or providing strategic financial planning tips, our team is committed to excellence and accuracy in every article.