Can businesses claim R&D Tax Credits for travel and subsistence costs?
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A highly popular and effective scheme introduced by the UK government in the early 2000s, R&D Tax Credits have the power to transform businesses by rewarding innovation and encouraging growth.
What are R&D tax credits and how do they work?
Research and development (R&D) Tax Credits act as a financial incentive for UK companies to engage in projects that invest in innovation. They are a much-needed and highly prized source of cash for companies to use in accelerating their R&D, taking on more staff and ultimately boosting growth. This in turn puts more money into the economy so its positive effects are wide reaching.
Any business that spends money on the development of new products, services or processes (or enhances existing ones) is eligible to make a claim for R&D tax relief. It can receive its R&D Tax Credits either as a reduction in its Corporation Tax bill or as a one-off lump sum. The good news is, the scope for identifying R&D is very broad indeed - in fact, qualifying projects exist in every single sector. Additionally, if a company is making a claim for the first time, it can usually claim R&D tax relief for its last two completed accounting periods.
What types of expenses do R&D Tax Credits cover?
A substantial part of the R&D Tax Credits application process lies in figuring out which costs a company is eligible to claim for and which it isn’t. The scope for this is actually quite wide but as a general rule of thumb there are eight kinds of qualifying costs. These are:
- Direct Staff costs
- Subcontracted R&D
- External, agency and temporary workers
- R&D consumables
- Payments to volunteers for clinical trials
- Software costs
- Costs involving the production of prototypes
- Contributions that are made to independent research
You say “Direct staff costs” but what are they?
This refers to the general cost of hiring staff as well as the costs that need to be taken care of during the course of their employment. These are things like salaries, pension contributions, reimbursed expenses and employer’s NIC.
So are travel and subsistence costs covered?
This is where things start to get a little less black and white. HMRC will allow businesses to claim R&D Tax Credits for travel and subsistence costs related to R&D as a proportion of its overall expenditure on staffing. This is particularly handy for founders, who often route travel and subsistence costs through the company, especially when their business is still relatively new.
To be eligible for R&D Tax Credits, the travel or subsistence costs must have already been paid out by the employee before being reimbursed by the business. So, if a member of staff needs to fly to a different country as part of their R&D activities for example, they must purchase their plane tickets with their own money before the company pays them back later. This is because only reimbursed travel and subsistence costs are counted as staff expenditure, and only then can they be considered for tax relief.
HMRC’s official guidance is clear that cash reimbursements of expenses, or other reimbursements that are paid alongside their salary, can be included in staff costs. Expenses are reimbursed as long as the original cost is borne by the employee. So for instance, expenditure incurred by a staff member using a company credit card would not be eligible for R&D tax relief as the money was not paid out by the employee initially.
Having said all of this, it’s still not enough to assume that a work-related expense which an employee has paid and then been reimbursed for will automatically qualify for R&D Tax Credits. Additionally:
- Costs incurred must be specifically for R&D activities
- Staff costs are actually eligible
While some businesses have reimbursement policies that are more generous than others, and are happy to pay for all meals and drinks purchased by the employee for example, HMRC still has a strict definition of what is and isn’t allowable as a staff cost. Allowable staff costs must satisfy certain criteria, namely:
- The cost is an expense the employee pays so that they can fulfil the requirements of their employment, and,
- The expense is a cost to the company for employing staff
Effectively, the take-home message is that just because an employee has paid for something work-related, and it’s been reimbursed by their employer, it doesn’t mean it’s therefore definitely eligible for R&D Tax Credits.
Tom needs to travel from London to Bristol to meet with a software agency that’s creating a new app for his organic drinks brand. Tom decides to take the train and pays £80 for his return ticket with his company credit card. When he gets to Bristol, Tom buys an egg sandwich for breakfast and jumps into a taxi to take him to the agency. He pays for both the sandwich and the taxi with his own money. The taxi costs £20 and the sandwich costs £3.
- Train ticket - £80. Can’t be claimed
The train tickets were purchased using the company card and so can’t be added to an R&D Tax Credits claim.
- Sandwich - £3. Again, can’t be claimed
While Tom’s company may reimburse him for his sandwich, as it was bought whilst he was travelling for work it is not an eligible staff cost as the travel was required as part of his employment.
- Taxi - £20. Claimable
This is a travel expense that’s directly related to R&D and was also paid for initially by the employee. This means the cost of Tom’s taxi does qualify for R&D Tax Credits.
Got a question or need further advice?
Tax Cloud - part of Myriad Associates - is an expert team of R&D tax advisors with years of specialist experience in R&D tax reliefs across the UK and Ireland. We understand that offering the most pertinent R&D tax credit advice to clients is not always straightforward.
If you’re not sure whether a cost qualifies for R&D Tax Credits, or have any questions about the R&D Tax Credits scheme in general, please feel free to get in touch either by calling us on 0207 118 6045 or using our contact page. We would be very happy to help.