Staffing Costs in R&D Tax Credit Claims: What is Included?

An FI Group UK Guide: Staffing Costs in R&D Tax Credit Claims

R and D tax credits are a valuable incentive for companies investing in innovation. One of the key components is working out staffing costs in R&D tax credit claims. Understanding what staffing costs can be included in R&D tax credit claims is crucial for maximising your benefit. This guide provides a comprehensive overview of eligible staffing costs, ensuring you make the most of your R&D tax credits.

What Are Staffing Costs?

Staffing costs refer to the expenses incurred for directors or employees who are directly and actively engaged in R&D activities. These costs can include:

Salaries and Wages: Payments made to employees for their work.
Bonuses: Additional compensation awarded to employees.
Employer National Insurance Contributions (NICs): Contributions made by the employer towards the employee’s NICs.
Employer Pension Contributions: Payments made by the employer into the employee’s pension scheme.
Reimbursed Expenses: Expenses reimbursed to employees that are directly related to R&D activities.

It’s important to note that costs related to benefits-in-kind do not qualify for R&D tax credits.

Direct vs. Indirect Activities

Staffing costs can be categorised based on the type of activities employees are engaged in:

Direct Activities: These are activities that directly contribute to achieving the R&D advance, such as design, development, and testing.

Qualifying Indirect Activities: These activities support the R&D process but do not directly resolve scientific or technological uncertainties. Examples include:

Scientific and technical information services.
Maintenance, security, administration, and clerical activities.
Training required to support R&D projects.
Feasibility studies to inform the strategic direction of R&D activities.

Staffing Costs in R&D Tax Credit Claims: Apportioning Staffing Costs

When only a portion of an employee’s time is spent on R&D activities, it is necessary to apportion their staffing costs accordingly. This can be done using timesheets or other project tracking data. Here are some common methodologies:

Without Timesheets: Estimate the percentage of time spent on R&D activities and apply this percentage to the total staffing costs.
With Timesheets: Use detailed project tracking data to calculate the exact time spent on R&D activities and apportion costs based on this data.

Calculating R&D Apportionments

For each eligible project, employees’ time should be assessed to determine the proportion of their work that qualifies as R&D. This can be done on a project-by-project basis or across multiple projects. The methodology may vary depending on whether timesheets are used:

Without Timesheets: Apportion total staff time based on a project-level R&D percentage.
With Timesheets: Use logged hours to calculate R&D hours and apply this to each staff member’s payroll cost.

Staffing Costs in R&D Tax Credit Claims: Qualifying Indirect Activities

Calculating costs for qualifying indirect activities can be more complex. These activities are often carried out by supporting functions such as finance, HR, and administration. Common methodologies include:

Without Timesheets: Estimate the percentage of time spent on indirect activities and apply this to the total staffing costs.
With Timesheets: Use project codes to track time spent on indirect activities and apportion costs accordingly.

What is an classed as an Employee in an R&D Claim?

An employee is generally someone who has a contract of employment with the company. In group companies, employees may be shared across different entities, but this does not affect their status as employees for R&D tax credit purposes. Payroll operations managed by another company within the group do not change the employment status of the staff.

Information About Employees Needed for Claims

To calculate staffing costs for R&D tax credit claims, the following payroll-related items are typically required:

Gross to net report or payroll report, including gross pay, bonuses, employer paid NICs, employee paid NICs, employee PAYE, and employer paid pensions.

This information helps in accurately calculating the PAYE cap and ensuring compliance with HMRC guidelines.

Detailed Breakdown of Eligible Staffing Costs

To further understand what staffing costs can be included in R&D tax credit claims, let’s delve into more specific details:

Salaries and Wages: This includes the basic salary or wage paid to employees. It is essential to ensure that the salary is directly linked to R&D activities. For instance, if an employee spends 60% of their time on R&D and 40% on other activities, only 60% of their salary can be claimed.
Bonuses: Bonuses can be included if they are directly related to the R&D work. For example, performance bonuses awarded for achieving specific R&D milestones are eligible.
Employer National Insurance Contributions (NICs): These contributions are a significant part of staffing costs. The employer’s NICs related to the portion of the employee’s time spent on R&D activities can be claimed.
Employer Pension Contributions: Similar to NICs, pension contributions made by the employer can be included in the claim. The proportion of the pension contributions that corresponds to the time spent on R&D activities is eligible.
Reimbursed Expenses: Any expenses reimbursed to employees that are directly related to R&D activities can be claimed. This includes travel expenses for attending R&D-related conferences or purchasing materials for R&D projects.

Apportioning Costs for Employees Mixed Roles

In many cases, employees may have mixed roles, where they spend part of their time on R&D and part on other activities. Accurately apportioning their costs is crucial. Here are some strategies:

Project-Level R&D Percentage: Determine an R&D percentage at the project level and apply this to the employee’s total time. For example, if a project is deemed to be 70% R&D, then 70% of the employee’s time on that project can be claimed.
Employee-Level Assessment: Assess each employee’s time spent on R&D activities individually. This method is more precise but can be time-consuming.

Importance of Accurate Record-Keeping

Accurate record-keeping is essential for substantiating R&D tax credit claims. Companies should maintain detailed records of:

Timesheets: These should clearly indicate the time spent on R&D activities versus other tasks.
Project Documentation: Detailed project plans, progress reports, and outcomes should be documented.
Financial Records: Payroll reports, expense receipts, and other financial documents should be kept to support the claim.

Staffing Costs in R&D Tax Credit Claims: Common Challenges and Solutions

Claiming R&D tax credits can be complex, and companies often face challenges such as:

Determining Eligibility: Not all activities qualify as R&D. Companies should refer to HMRC guidelines or consult with R&D tax credit experts to ensure eligibility.
Apportioning Costs: Accurately apportioning costs for employees with mixed roles can be challenging. Using timesheets and detailed project tracking can help.
Maintaining Documentation: Keeping thorough and accurate records is crucial. Implementing robust record-keeping systems can streamline the process.

See all categories of qualifying expenditure, here.