Maximising R&D Tax Claims on Staff Costs: A Guide for Businesses
When making R&D tax claims on staff costs, it's essential to understand what qualifies. Whilst HMRC allow R&D tax relief for staff costs related to research and development not all expenses qualify.
What are qualifying costs?
When making R&D Tax claims on staff costs, firstly you need to consider those costs that qualify for inclusion in a claim.
Typically these cover wages, salaries, commissions, bonuses, and tips paid to employees or directors. Additionally reimbursed expenses (see below) and Employers NICs also qualify. What's more, so do pension contributions plus those compulsory social security payments under EEA or Swiss law.
Additionally, if you recruit specific R&D staff for a project, those associated HR and recruitment costs may also qualify.
However, not all expenses related to staff are eligible. For example, R&D tax claims on staff costs can't include benefits in kind. Additionally, redundancy payments, gardening leave payments, or dividends. Equally importantly only the staffing costs of those directly and actively engaged in R&D can be claimed.
What are qualifying activities?
To qualify as R&D, the employee's activities must contribute to scientific or technological advancements. They must also fall within the guidelines set by the Department for Business, Innovation and Skills (BIS). It’s crucial your ensure these activities are part of a structured plan and clearly identifiable as part of an R&D project.
Those Staff who support R&D though are not directly involved in the research itself do not count. For example, admin support staff would not qualify. Furthermore, these costs must also be apportioned if staff are not fully engaged in R&D activities. It is only the time spent on qualifying R&D can be claimed.
Reimbursed expenditure
Not all of those expenses incurred by employees can be claimed, even if it relates to their role in R&D.
For an expense to qualify, it must be an expense to the company of employing staff. Additionally, the expense must be something the employee pays to fulfil their job requirements.
However, it’s not enough for the expense solely to be relevant to the job or incurred in connection with their role. Furthermore. it can't be just to prepare an employee to start work or to maintain their qualifications.
According to HMRC, some reimbursed expenses may qualify for R&D tax claims on staff costs. For instance, travel and subsistence costs directly related to qualifying R&D work are allowable. Although, these expenses must be directly attributable to the R&D activities to be claimed.
However, not all reimbursed expenses qualify. HMRC’s guidance clearly states that home-to-work travel, training, meeting room hire, and travel for board meetings are not eligible. These costs, while potentially related to business operations, don't meet the criteria for R&D tax claims on staff costs.
Other points
If a significant amount of a director/shareholder's time is spent on qualifying R&D then the availability of R&D relief should be considered when determining the most tax-efficient structure.
Whilst dividend payments might be a better option for the director. The additional Corporation Tax relief available for salary payments might be more tax-efficient overall.
Additionally, the enhanced relief available for pension contributions is an option worth considering. This is especially relevant given that there may be changes to pension tax relief introduced in the 2024 Autumn Budget.
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