Can you include VAT in an R&D tax credit claim?

Usually, VAT cannot be included as part of an R&D tax relief claim. This is because businesses that are registered for VAT can normally recover it through their Value Added Tax returns. As a result, recoverable VAT is not generally treated as qualifying expenditure for R&D purposes.

There are some exceptions to this rule. If a business cannot recover the VAT paid on costs that would otherwise qualify for R&D tax relief, it may be possible to include the irrecoverable VAT within the claim. Whether a business can recover VAT depends on its VAT status and the nature of its activities. For example, some businesses are partially exempt from VAT or carry out exempt activities. In these circumstances, they may not be able to recover all of the VAT they incur.

Complexities begin where business expenditure relates to:

• Activities in several categories
• Partially exempt business activities
• Subcontracted work

In these situations, it is important to review invoices and the VAT treatment applied rather than assuming that all VAT is automatically excluded from the R and D claim.

Businesses should also be aware that HMRC may expect consistency between the figures included in an R&D tax credit claim and the company’s VAT records. If irrecoverable VAT is included as qualifying expenditure, there should be a clear basis for doing so, supported by the company’s VAT position and accounting treatment.

As with most areas of R and D tax relief, the detail matters. A project-level review of expenditure can help identify where irrecoverable VAT may legitimately form part of a claim, while reducing the risk of overstating qualifying costs. It is important to remember that irrecoverable VAT can only be included where the underlying expenditure itself falls within a qualifying category of R&D expenditure.