How To Claim For Staff Costs In An R&D Tax Claim

You’ve got a project that qualifies for R&D tax credits, your staff have spent plenty of time on it and you’re ready to get started on making your R&D tax claim. But then you get into the nitty-gritty of actually calculating your R&D expenditure and you stall, not knowing which rule applies to whom and when. Sound familiar?

Luckily, we’ve broken down all you need to know about claiming for your staff costs across all the schemes and with all the caveats spelled out, so you can rest easy knowing you’ve made an accurate claim.

What kinds of staff work qualifies for R&D tax relief?

It’s common for an R&D team to consist of many individuals from different parts of the business. There is no blueprint or set list of staff that could contribute to R&D. Smaller companies may find everyone chipping in on the R&D project, regardless of job title. Larger businesses are more likely to have prescribed roles and functions within a dedicated R&D team. So long as your R&D project qualifies, there’s no requirement for R&D-related job titles or formal team structures.

However, as a guide, your R&D project team may include staff that fall into the following categories:

• Directly contributing activities undertaken by engineers, developers, technicians, scientists, etc. These are usually your ”competent professionals”.
• Supervisory activities commonly performed by team leaders, department managers, and product managers.
• Senior management, such as the chief technical officer, may work directly on qualifying activities, especially for micro and small businesses. Other senior management may work indirectly on the project by providing overall project management, technological research and strategy, or financial project management.
• Staff members involved with indirect supporting activities such as technological research, project costing, HR recruitment, administration and clerical activities insofar as undertaken for R&D activities.

Even apprentices can be involved in R&D projects; their costs can be included if they’re on the payroll, however payments to training providers and the Apprenticeship Levy are not eligible.

Apportioning staff costs

HMRC expects companies to maintain accurate records regarding staff time spent on qualifying R&D activities. Good practice is for staff to record timesheets against tasks assigned to work packages and projects.

Example 1

Joe Bloggs spent 25% of his time across the year on R&D for Project 1, 20% on R&D for Project 2, and 5% on R&D for Project 3. This means that 50% of his time was spent on R&D, and therefore, 50% of his salary costs can be included in the R&D tax claim.

Example 2

Jane Bloggs spent 100% of her time working on a single project for the company, but only 20% was spent on R&D activity, and the rest was relatively standard work. Therefore, the company can only claim for 20% of her costs.

Staff costs that can be included

For staff working directly on the R&D project, you can claim for the following costs:

• Salaries/wages
• Bonuses
• Pension fund contributions
• Secondary Class 1 National Insurance contributions paid by the company
• Qualifying employee reimbursed expenses consumed directly for the purposes of carrying out the R&D activities.

The employee needs to pay for the qualifying expenses and make an expense claim for them to be included in the R&D tax claim. For example, if a staff member pays for petrol to drive to an important meeting for an R&D project and is later reimbursed by the company, the company can include that cost in the claim in the claim. However, if the staff member uses a company credit card, this cost cannot be included in the claim.

Directors’ pay and R&D tax relief claims

In many start-ups and small companies, the directors choose not to draw a salary and instead receive dividend payments. This may be advantageous from the point of view of individual taxation, but if the company is undertaking R&D and a director is involved heavily in R&D, you may wish to consider alternative arrangements.

Companies cannot claim R&D tax relief on dividend payments, but they can claim on salaries, employer’s National Insurance, and company pensions. Therefore, depending on the proportion of time the directors devote to R&D projects, it may be more advantageous for the company if the directors take a salary so that those costs can be included in the R&D tax relief claim. The benefits of this approach should be evaluated on a case-by-case basis.

PAYE & NIC Cap

The PAYE & NIC cap affects the amount of cash credit that a company can claim. Only loss-making SMEs can claim a payable cash credit by surrendering their losses.

By tying the cash credit to a company’s UK staff cost liabilities (the Pay-As-You-Earn and National Insurance Contributions). The cap means that loss-making SMEs can only claim a payable tax credit of up to 300% of their combined PAYE and NIC liabilities, plus a £20,000 buffer.

SMEs can only claim a payable tax credit of up to 300% of their combined PAYE and NIC liabilities, plus a £20,000 buffer.

HMRC defines this cap as £20,000 plus three times the company’s “relevant expenditure on workers.”

Relevant expenditure on workers means the total liabilities for PAYE and NIC for the company’s employees and directors (regardless of R&D involvement) plus PAYE and NIC of any connected EPWs or connected subcontracted R&D (restricted to the appropriate R&D apportionment).

Questions? Download our eBook!

Still not sure what costs you can claim, or if your claim is eligible at all? Our R&D tax eBook should answer all your questions, from qualifying projects to how to submit your claim.

Download your free copy here.

Alternatively, get in touch with our experts for a free review of your claim.