R&D tax claims after the reset: Calculating qualifying expenditure

Qualifying expenditure sits at the centre of an R&D tax relief claim. Even where eligibility and narrative are robust, errors in cost identification or apportionment can undermine the overall outcome.

We’ve already covered eligibility and technical narrative , and in this third article in our ‘Back to basics’ series, we revisit the core principles that apply when identifying and calculating qualifying expenditure.

What costs qualify for R&D tax relief?

The R&D qualifying expenditure for tax credits includes the costs of paying people to do the work, paying for the consumables used during the work, and paying for external resources where necessary. Most costs are common to all current schemes, with some exceptions. The allowable cost categories are as follows:

Staff costs

Consumables

Clinical trial volunteers

Software

Data licences

Cloud computing

Externally provided workers

Subcontractors

Independent research

For each category, HMRC expects the claimant company to be able to evidence their spending and apportion cost to each project in a fair and reasonable way. In addition, the costs must align with the published accounts for the period.

Staff costs

Staff costs usually make up the bulk of the costs in an R&D claim, and are reasonably straightforward to calculate. You can include:

Staff costs includes salary, bonuses, employer’s NIC and pension costs

Out-of-pocket expenses, if they relate to R&D projects

Staff costs can be apportioned according to time spent resolving technological uncertainties, and the rules for staff are the same across all current R&D tax relief schemes.

Consumables costs

Consumables costs are also the same across all current schemes. Companies can claim for the costs of:

Raw materials used up, consumed or destroyed during the R&D project

Utilities used for R&D projects.

These costs should be apportioned to R&D projects on a fair and reasonable basis, and the company should retain evidence of the costs and what they related to.

Clinical trials

Payments made to clinical trial volunteers can be included in claims made under any of the current schemes. Other costs of clinical trials, such as payments made to subcontractors running the trials, or raw materials required for the trials, can be included in the relevant categories.

Software, data and cloud computing costs

Each of these costs can be included in claims under any current scheme, depending on the start date of the accounting period. These costs include:

Software packages used for R&D projects;

Cloud computing costs related to R&D project (only valid for accounting periods starting on or after 1st April 2023);

Data licence costs related to R&D projects (only valid for accounting periods starting on or after 1st April 2023)

These costs should be apportioned to R&D projects on a fair and reasonable basis, and the company should retain evidence of the costs, and to what they relate.

Independent research

Independent research costs can only be included in old RDEC claims (claim periods starting before 1st April 2024) made by large companies. This covers payments made by the claimant company to qualifying bodies to carry out relevant research on behalf of the claimant company.

Externally provided workers

Where workers are paid through a third party to provide services related to R&D, a reasonable proportion of these costs can be included. While EPW costs can be included in all claims, the rules around which EPW cost and what proportion of these costs can be included vary depending on the scheme, whether the company providing the workers is connected to the claimant company and whether the workers are subject to UK PAYE.

How WhisperClaims supports cost calculation

WhisperClaims ensures that only relevant cost categories are presented for each claim and accounting period. Our platform applies the correct scheme-specific restrictions and apportionments transparently and consistently.

If you’re reviewing your approach to qualifying expenditure, our recent webinar, “R&D tax claims after the reset: Re-examining eligibility, evidence, costs & benefit”, explores how cost identification and calculation fit into a compliant end-to-end process.

And for a more in-depth exploration about how WhisperClaims can support your in-house R&D tax service, why not book a demo?

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