R&D Tax Credits – Qualifying Activity and Qualifying Expenditure

Share This Post

“Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects” (gov.uk)

There are set standards in place for whether or not your company can claim R&D back. Therefore, in this blog, we will be discussing both the qualifying activity and qualifying expenditure that will put your business in a place to be considered for R&D tax credits. 

So lets start with the Qualifying Activity…

Qualifying activities are “the activities you’ve done, the things you’ve undertaken and the projects you’ve been involved in that qualify for R&D relief” (Apogee Associates). We also have a great video from Apogee Associates on this on our Watch page!

According to HMRC, there are 4 key points a project needs to tick off in order to be considered R&D: 

1. An advance in science and technology 

An advance in science and technology means that the objective of the project is to attempt to do something above and beyond the technology that is already within the sector. The advancements and innovation within the project have to specifically apply to the wider sector. For example, attempting to make a production process within the sector more efficient or environmentally friendly than it is in its current state, or equally developing a new product that has not been created before by any other company. 

2. Technical uncertainty 

Technical uncertainty is a scenario when you are using technology to solve a problem, but you are unsure how to solve the problem with technology. Therefore, this is when you would undertake research and development to figure this out. 

*To note, commercial uncertainty falls outside the R&D bracket. For example, having to conduct market research to see what price point you are going to bring your product into the market at. You would not qualify for R&D tax credits for this.

3. Competent professionals working on the project 

A competent professional is anyone who has relevant sector experience, relevant qualifications or has had an insight into the technology that is being used in the project. If the competent professional has trouble figuring out a problem, such as a software issue, and they need to try different methods to come up with a solution – this would be considered technical uncertainty.

4. Overcoming the technical uncertainties 

To put it simply, you need to take action and do something to overcome the technical uncertainty. If you do not take action, you will not be able to claim R&D credits.

Moving onto Qualifying Expenditure…

Qualifying expenditure is “the costs you’ve incurred related to the project that are eligible to be recovered under the R&D tax credit scheme” (Apogee Associates).

According to HMRC, there are 4 main categories of types of cost you can include when applying for R&D tax credits:

1. Staff costs

You can include salary costs, national insurance contributions, pension contributions, bonus payments, overtime payments and travel expenses in your staff costs. 

Salary costs can include your employees that are involved either directly or indirectly in R&D. Direct R&D involvement would be doing things such as project management, being hands-on with the R&D project and developing it in some way, shape or form. An example of indirect involvement would be someone who is providing maintenance, security or administrative duties to the project.  

2. Software costs 

Similar to staff costs, you can have software that is also either directly or indirectly used for R&D.

3. Subcontractor costs 

An R&D subcontractor is anyone who is not on the payroll but you are paying to do R&D work on your behalf. This could be either a third-party company or someone who is self-employed. It is important you identify who is undertaking the financial risk in the R&D project early on, so you know to whom the R&D credits will be processed. 

You are actually only allowed to include 65% of the subcontractor costs within the R&D application, so it is slightly more restricted than your regular staff costs.

4. Consumable costs 

Consumable costs include materials that are consumed or destroyed within the project and prototypes that are built and not sold to a client. If you do end up selling your product to your client, you are not going to be able to include that in your R&D application.

If you add all these areas of Qualifying Expenditure together you will end up with your Qualifying Expenditure figure, which is what your recovery is based on.

For more videos on R&D tax credits, we have some great videos from Nat at Apogee Associates. Click here to view.