HMRC allow only certain costs in resepct of the R&D project to be included into the claim.
Costs incurred from the date you start working on the uncertainty until you develop or discover the advance, or the project is stopped can be included.
In brief these costs are:
|Staff Costs||The claim can include a proportion of relevant individual’s salaries, Class 1 NIC, pension contributions. The proportion is to cover employees who directly undertake R&D work and includes supervisory and managerial time spent specifically directing employees on R&D activities. Support staff costs do not qualify, except to the extent they are engaged in the ‘qualifying indirect activities’.|
|Externally Provided Workers||Staff costs paid to an external agency for workers engaged in the R&D project. Relief is restricted to 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected.|
|Subcontractors||Subcontracted R&D has different rules depending on whether the company is a SME or Large Company. Further rules apply if the companies are connected. As a general rule only 65% of subcontractor costs can be included in the R&D claim.|
|Consumables||The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.|
|Software||You may claim for the cost of software that is directly employed in the R&D activity. Where software is only partly employed in direct R&D, an appropriate apportionment should be made.|
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Costs that can’t be claimed
The R&D claim cannot inculde any costs to that are not within the above categories. For example, you can’t claim for:
- capital expenditure
- the cost of patents and trademarks
- rent or rates
- costs relating to the production and distribution of goods and services
When does the R&D activity start and end?
It is important to identify the timeline of your project, then you can accurately allocated costs. The R&D activity starts when you begin working to resolve the uncertainty and ends when you solve the uncertainty or stop working on it. As a broad principle you can determine the R&D project for tax reasons finishes once you have a working prototype yet before production starts.
It may be the case that Version 2 of the project then commences, and the opportunity to claim R&D tax relief arises again.