What Counts as R&D?
HMRC defines activity that meets the following two criteria as eligible. The activity must be:
1. Seeking to create an advance in the field of science or technology.
2. Overcoming scientific or technological uncertainty in order to achieve this.
This could sound like the incentive is only available to academic institutions and scientific research organisations, but that isn't at all the case. HMRC have left the definition deliberately broad to ensure that all forms of R&D are taken into account. We've worked on claims for food makers, boutique jewellers and space-exploration equipment manufacturers.
The R&D credit is most commonly claimed by companies in these sectors: software development, manufacturing, engineering, construction and pharmaceuticals. However, if you're not in those sectors that doesn't mean you shouldn't claim. Claims come in from all sectors of the economy - and you might find that one of your side projects has qualifying costs while your main business activity does not.
Importantly, the success or failure of the R&D project has no bearing whether you can claim – it’s about the pursuit not the outcome!
While many companies will claim for the development of new products, they may miss the R&D that goes into improving existing production processes.
It's best to check your eligibility with a qualified advisor, and at EmpowerRD we provide all eligibility assessments free of charge.
Eligible R&D Activity
When compiling an R&D tax credit claim, we look for the following types of qualifying R&D spending:
You can claim for salaries for staff directly involved with the R&D project. Staff costs can also include class 1 NIC, pension fund contributions, some reimbursed expenses and bonuses.
Items that are directly employed and consumed in the R&D projects can also qualify. This includes physical materials and hardware as well as utilities such as the cost of power, water and fuel used directly for carrying out R&D.
Software that is directly employed in the R&D projects can also qualify. If only a part of the software was used directly in R&D, then an appropriate proportion of the cost of the software can qualify.
The costs of testing the design and construction of a prototype following an R&D project will normally qualify. Note that if the prototype was created with the view of selling the product then HMRC considers this to be outside the R&D scheme (even if R&D was undertaken to construct the prototype).
These are the staff costs paid to an external company for staff who are directly involved with the R&D project these are not employees and subcontractors. You can claim up to 65% on the payments made to the external staff provider.
As a rule of thumb, you can claim for 65% of the payments made to unconnected parties in the SME scheme. However, you can qualify between 0-100% of the expenditure if the subcontractor is a connected party (i.e. a parent company, a subsidiary etc.).