Qualifying activities for R&D tax incentive claims

What is R&D defined as?

Research and Development is work carried out by businesses that are working to innovate in their field and to solve technological or scientific barriers (for example) by creating new products and solutions. Essentially, this is exploratory work that seeks to find a solution to a problem where no evident or practicable one currently exists. For the purposes of R&D tax credit claims, these projects span work undertaken on behalf of a client as well as an in-house project for the business itself.

HMRC has purposely left the definition of qualifying R&D broad in order to stimulate activity that benefits the broader economy and Britain's economic position on a global scale. So, regardless of how big your business is or the sector it operates in, if you are taking on a risk by attempting to solve an uncertainty in the field of technology or science, then you are likely to be undertaking R&D. This could include creating brand new products, services or processes or making existing versions of these better. Bear in mind, however, that R&D work only applies until the project's elements of uncertainty have been resolved. Once a solution has been developed and moves into commercial marketing development or user-testing, it no longer counts as R&D. Your R&D tax incentives advisor at F.Initiatives will be able to provide expert advice and guidance on the activities within your business that qualify for research and development tax credits or UK grants.

How can I work out time spent on R&D for my staff?

As part of your research and development tax incentive claim, you need to be able to apportion expenditure to your qualifying R&D activity and this includes assigning a cost to the work carried out by your staff. This will depend on the nature of the project being undertaken and the records that you keep for staff timekeeping. Companies that only become aware of their ability to apply for an R&D tax credit or R&D grant often have not kept detailed records for staff time undertaken on qualifying R&D activity, so the type of records and the degree of detail will vary between companies. A timekeeping system is an ideal way to evidence staff time on R&D but businesses will use a certain element of estimation where limited records - or no records - exist. Luckily, HMRC does take a broadly pragmatic view on this issue, especially if your business has never applied for R&D tax credits before. Other methodologies could include internal records that evidence start and end dates of a project and the team involved, with their roles. Be careful when records span R&D and commercial work together as the two must be separated for R&D tax credit claims. The R&D element will just be a single deliverable under the entire commercial product. Your F.Initiatives advisor will be able to guide you through this issue to provide the right information in a way that HMRC values.

In this situation, it is best to get your accountant to add an adjustment to the following year accounts for prior-year confirmed figures. Our expert team can also help you to time the submission of R&D tax credits so that your tax liability is reduced before the accounting due date and your cash flow is positively affected. The F.Initiatives team will help to ensure that the necessary adjustments are made at the best time for your circumstances as part of a highly streamlined and efficient process.

Should employee expenses be included in my R&D tax credits claim?

There are some types of business expense that HMRC will allow. The criteria for these do change fairly regularly however so your R&D tax credit advisor will always be best placed to advise on the latest set of permitted expenses. As a general rule of thumb, reimbursable expense will need to directly relate to R&D project activities and be classified as a staff related cost.

Can I include pension contributions in a research and development tax credit claim?

Yes, employer pension contributions can be included in an R&D tax credit claim as a qualifying expenditure, so long as the employee is working on the R&D project that forms the basis of the claim. Other costs can be included in the research and development tax incentive claim too, such as employer NI contributions, staff salaries and business expenses. For more detailed advice on this, be sure to contact your R&D tax advisor.

Can I include a director dividend in my business R&D tax incentive claim?

No, payments to directors under the company dividends scheme cannot be included as qualifying expenditure when you submit an R&D tax credit claim. From the perspective of personal taxation, many directors will opt for dividends as their form of remuneration, rather than taking a salary. However, where individual directors are heavily involved in R&D projects, the payment of their dividends can have a significant effect on the overall value of the research and development tax credit claim. Note that, although dividends do not count as R&D tax credit qualifying expenditure, some staff costs do. National Insurance contributions, salaries, and pensions are some examples of qualifying expenditure.

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