R&D Qualifying Expenditure

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

R&D Qualifying expenditure

General

There are a number or requirements and restrictions on the type of expenditure that can be brought in to account for the purposes of R&D relief.

Project Cap

Firstly, there is a cap of €7.5m per project.

Where expenditure exceeds the cap for a project then RDEC may be claimed on the excess.

Revenue

The first is that it must be revenue – I assume we are familiar with the difference between revenue and capital.

For capital items, there is a R&D Capital Allowance scheme which allows you to write down all of your R&D spending on fixed assets. Unlike the Annual Investment Allowance, RDA is not capped. But that’s not the subject of today.

Relevant to trade

Generally, most R&D expenditure will relate to the trade – it will either be used in the trade or might be licensed to others. Both will qualify. It is not necessary for the company use it to create its goods or provide its services.

Further, one could have a group company which carries out the R&D for other group companies.

Qualifying staff costs

 

Staff costs are allowable and will often be the main source of qualifying expenditure in a claim.

Note, if someone spends, say, 25% of their time on R&D activity, then 25% of their costs can be claimed.

Staff costs are not just salaries, but will also include Employer NIC and even contributions to a pension scheme.

Note, qualifying staff costs do not include benefits in kind.

This can be a problem for start up / high growth tech businesses which might seek to reward staff with share options. These are not qualifying costs.

Further, the payment of dividends do not count as qualifying staff costs – so this should be considered if you act for the Company generally. In other words, consider the interaction between their remuneration structure and R&D?

 

Consumables

These are items that are eaten up in the R&D project.

This might include test tubes or vials but might also include power and water.

Admin supplies, such as printer toner and paper, are not usually considered as consumables/

 

Subcontracting

 

An SME can subcontract work to a business. For example, an office food supplier might subcontract its software development to a software developer in Dubai.

The SME can still claim relief.

The firm undertaking the work cannot.

However, the SME co has a slightly different dance to go through.

First question is are they connected?

If so, then the SME can claim the lower of:

  • Costs that the subcontractor co includes in their accounts re staff and consumable costs on the project; and
  • The amount paid by the SME Co

If they are not connected, then they can JOINTLY elect for the treatment above.

If not connected and can’t elect then the SME can claim 65% of the payment as an additional deduction.

Grants and subsidies

General

We have to be careful where a project has obtained a grant or a subsidy. Note, it is the project that is important.

R&D relief is state aid – and one cannot compound state aid. Most, but by no means all,  EU / Government funding is state aid.

Two types of state aid:

  • Notified state aid; and
  • Non-notified state aid

If one receives Notified State Aid – such as the Smart Grant – in connection with a project then none of the expenditure can qualify for relief. RDEC can be claimed instead.

In the case of non-notified state aid – eg the Horizon 2020 programme – this reduces the amount that can qualify for the SME Relief.

Again, the balance may qualify for RDEC.

Covid 19 support

In respect of furlough claims, then these are unlikely to be in respect of a project so these should not be a problem.

One needs to be more careful with CBILS and Bounce Back Loans. Both of these are likely to be notified state aid. So, if funds raised through these channels are used on the project then this could be deleterious. Tread carefully.

In any event,it should still be possible to claim RDEC.

 

If you have any queries about R&D Qualifying expenditure or R&D in general then please do get in touch.

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