A question that we often receive is ‘Which costs qualify for R&D tax relief?’
In this blog, we will outline these expenses and give industry-specific examples for each cost category. Firstly, let’s recap on what R&D tax relief is and its importance for businesses.
What is R&D tax relief?
R&D tax relief is a scheme implemented by the UK government to incentivise innovation and foster economic growth. This scheme provides financial support to companies engaging in qualifying R&D activities. Administered by HMRC, they define R&D as activities involving the creation, modification, or enhancement of a product or service, as well as addressing problems without an existing available solution. These efforts must aim to achieve advances within the fields of science and technology to qualify through the resolution of scientific or technological uncertainties. When making an R&D tax credit claim, eligible companies can reduce their tax bill or receive a cash payment for the credits.
The importance of R&D tax credits for UK companies
Understanding the costs eligible for this relief is crucial for businesses looking to maximise their innovation efforts while minimising their financial burdens. We know how important it is to get money back into a business, accordingly, we will detail the costs which may be claimable for your business.
R&D tax credits: What can be claimed?
The costs associated with the outlined qualifying expenses are eligible costs for R&D tax relief. Summarised are the key expenses that businesses can claim under R&D tax relief in the UK. *Please note that these are examples only and eligible costs will differ between projects undertaken.
Staffing
Gross salaries, national insurance, pension contributions and travel expenses can be claimed in relation to the portion of employees' salaries directly attributable to R&D activities.
Consumables
Expenses related to the resources utilised throughout your business's R&D process include consumables such as materials and utilities, including raw materials, prototypes, and testing equipment. These materials must have been consumed, transformed or destroyed in the course of undertaking the R&D activities and cannot have commercial value in order to be qualified.
Software
Encompassing any expenditure on software which is directly employed for R&D purposes. This includes both the purchase cost and any costs related to using the software.
Sub-contracting/Outsourcing
If a business outsources part of their R&D to external contractors, the company can claim a proportion of the cost in their R&D tax credit claim.
Externally Provided Workers
EPW are agency workers. There are strict definitions around what constitutes EPW, if the workers are involved in R&D projects and are solving uncertainties then their costs can be claimed.
Industry-specific examples:
Costs eligible for R&D tax relief within the Software industry
Staffing
Normal staffing costs are eligible. This is often the highest component of a claim within the software industry.
Consumables
Normal consumable costs apply as such utility bills.
Software
Software licenses are usually an element of software claims. For accounting periods beginning on or after 1st April 2023, data licenses and cloud computing costs can also be eligible as qualifying for relief. This holds an opportunity to increase the claim amount moving forwards as many companies tend to rely on cloud-based servers for their data storage infrastructure.
Outsourcing/EPW
Software companies usually rely heavily on both internal and external workers. Externally provided workers are often from a consultancy and hired for additional development work. Subcontractors hired for specialised development roles such as penetration testing.
Costs eligible for R&D tax relief within the Manufacturing industry
Staffing
Normal staffing costs are eligible.
Consumables
Items including metal sheets, metal tubes, inert gases (for welding), welding rods (tungsten for example), water to operate CNC machines, cutting heads, plastics, ceramics, and composite materials.
Software
CAD/CAM software (i.e.Solidworks, CATIA, NX, Fusion 365), finite Element Analysis (FEA), software(such as Abaqus, LS DYNA), and simulation/modelling (ANSYS)
Outsourcing/EPW
Within manufacturing umbrella companies (for example, would typically be used to find skilled labour in the engineering industry).
Costs eligible for R&D tax relief within the Architectural industry
Staffing
Normal staffing costs are eligible. Within architecture, this is the main cost category.
Consumables
Normal consumable costs apply as such utility bills.
Software
Autocad, Archicad, Revit (BIM), Rhino (grasshopper), Vectorworks, and Adobe suite.
Outsourcing/EPW
This is largely dependent on the type of architectural contractual agreement for example, if it is a Design and Build project or not. Other costs within this category are lighting, structural, façade, mechanical and electrical engineers.
Costs eligible for R&D tax relief within the Construction industry
Staffing
Normal staffing costs are eligible. Within construction, this often encompasses staff time which has been dedicated to designing, testing, and implementing new solutions.
Consumables
Any aggregate materials used in the construction process such as concrete, steelwork, timber, and insulation material. Naturally, within this category, there are many associated consumable costs but to qualify thesematerials must have been consumed, destroyed, or transformed in the R&D process.
Software
Structural modelling software such as CAD, building modelling software such as IM REVIT.
Outsourcing/EPW
Costs often include subtractors who have been brought into the business to carry out packages of work associated with the R&D, examples of which would be piling specialists and structural engineers. Agency or third-party workers who have been onboarded to the project to assist with R&D activities may also be included.
Costs eligible for R&D tax relief within the Electrical industry
Staffing
Normal staffing costs are eligible.
Consumables
Printed Circuit Boards (PCBs/Microprocessors), electrical components (diodes, capacitors, resistors),excess waste (wires, solder, chemicals, metal layering), and tools (drills, saws,etc).
Software
CAD and Altium Designer.
Outsourcing/EPW
Normal outsourcing costs are eligible.
Costs eligible for R&D tax relief within the Agricultural industry
Staffing
Normal staffing costs are eligible.
Consumables
Feed, fertilisers, sundries, seeds, animal purchases and medicines.
Software
Statistical analysis software or trial management software could be claimed. Standard farm management software can’t typically be claimed for.
Outsourcing/EPW
Silage Contractors, consultants or genetic specialists.
Additional Resources:
For more information on the R&D scheme please visit our R&D tax relief webpage.
Navigating the complexities of R&D tax relief can be intricate therefore we recommend seeking professional advice from an R&D tax firm to ensure compliance and to ensure that all possible qualifying costs are accounted for in your claim. Here at RCK Partners, we have experienced consultants within each of the available industries to help our clients maximise the benefits available.
Contact us for a free audit of your tax status.
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