This article and summary video covers how to claim staffing costs for employees under the UK government’s Research & Development Expenditure Credit (RDEC) rules. It looks at the critical difference, between staff directly undertaking R&D activities and those undertaking indirect supporting activities. This needs to be understood to claim correctly and make the most of UK R&D incentives.
Here we specifically look at claiming staffing costs, because there are some nuances that you need to be aware off, in order to correctly compile your staffing costs, for completion of the R&D online Additional Information Form.
Staffing costs are the costs of employees on your payroll, that are subject to UK payroll taxes. You will need your payroll reference to complete the online R&D form.
Don't be tempted to include freelancers or self employed people in staffing costs as they do not fall into this category. Depending on the circumstances they may be considered contractors.
When claiming R&D tax relief, you can include staffing costs, but only for employees engaged in or supporting R&D activities. These are covered under two distinct categories:
1. Staff that are Directly Contributing to R&D Activities
To directly contribute to R&D an employee must be involved hands-on in undertaking R&D activities that meet qualification guidelines. Generally, these will be your scientists, engineers, or software developers, i.e. the people working on resolving the scientific or technological uncertainty associated with achieving the advance you are seeking.
2. Staff that are Undertaking Qualifying Indirect Activity
Qualifying indirect activity is activity undertaken by employees that are supporting the direct R&D activities, like project managers, security staff for a laboratory undertaking R&D, people writing up reports on the R&D results, or people sourcing R&D equipment or materials, or maintaining research and development equipment.
Under both categories, the activities that are claimed must have a tangible link to the R&D project and not be routine activities that would need to be undertaken whether or not there is an R&D project being worked on. An example of a routine activity would be staff responsible for paying salaries or undertaking general administration.
When claiming employee salary costs, you can include the gross salary, employer National Insurance Contributions (NICs) and any company pension contributions, plus allowable reimbursed expenses. Allowable reimbursed expenses are expenses that are necessary to support direct R&D activities such as essential travel and subsistence costs, but only if the employee initially paid these costs and was reimbursed by the company.
The employment cost, per employee, needs to be based on a percentage of your actual payroll records, as submitted to HRMC.
Most employees don’t spend 100% of their time on R&D and in compliance checks HMRC will often challenge claims where 100% of a person time is claimed as R&D. You must therefore apportion an employee’s time and costs. For example, if an engineer spends 60% of their time on qualifying R&D, only 60% of their payroll cost is claimable expenditure.
The percentage used can be based on the actual, or estimated, time spent on eligible activities. Keeping accurate time records helps justify your claim. If you have to estimate the time spent, it’s advisable to keep a record of how you arrived at the estimated amount.
I have not mentioned Externally Provided Workers, that are supplied through an agency, or claiming non payroll contractor costs, those will be covered separately.
To maximise your RDEC claims, keep records of staff time spent and activities undertaken, per employee, clearly separating direct and indirect R&D activity and costs, so the total of each category can be calculated. This breakdown is needed to complete the mandatory online R&D Additional Information Form.
See HMRC guidelines on Claiming Staffing Costs.