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Design costs as Research and Development?

I have just started working as a management accountant for a husband and wife clothing and accessories design company. 

They have asked whether the are able to treat any of their design research and sourcing costs as r&d for tax purposes.  They've included travel and accommodation costs in here, which my gut tells me would be a no, but are there any types of design & sourcing research costs that could be treated as r&d?

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By BJ
03rd Jul 2010 12:46

Probably not

You need to consider a couple of things with regards to claiming R&D tax relief.

The first one is whether the activities qualify. Design for the purposes of fashion is very unlikely to qualify under the criteria of seeking an advance in science or technology. Only a fashion design that is in some way scientifically advanced would qualify. An aesthetic improvement alone would not qualify as R&D.

Furthermore, only the activities that directly contribute to the resolution of technical or scientific uncertainties qualify as R&D. This means that even if a design or new manufacture process can be shown to be a scientific advance, you would need to pro rata the costs allowed. Some indirect activities can also qualify, such as admin, maintenance, security, HR functions and training, but only so far as they can be shown to be related to the qualifying R&D projects. Sourcing of materials does not qualify.

Secondly, only certain costs qualify. Travel and accomodation costs do not qualify. The only costs that are likely to qualify in this instance are labour by employees (salary, pension contributions, employer's NICs), subcontractors and externally provided workers (65% of cost unless connected), consumable items and software. And these need to be apportioned to fit time spent on the qualifying activity above.

Both activity and costs appear to be an issue here.

I would suggest they may only claim against costs relating to incorporating new materials in designs (involving some technical uncertainties) and improvements in the actual manufacturing processes involved.

I hope this helps a bit.

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