How to calculate staff costs for UK R&D claims?

To calculate staff costs for UK R&D claims, the business needs to determine the proportion of each employee’s time spent on qualifying R&D activities. This can be done by using a reasonable and supportable method, examples include:

• Timesheets
• Project tracking data
• Documented estimates from a competent professional

Once the proportion of qualifying R&D expenditure has been established, apply that percentage to the employee’s total eligible earnings. Where time spent is used as a supported method of apportionment, an employee who spends 30% of their working time on qualifying R&D activity would have 30% of their relevant employment costs included in the claim.

Eligible staff costs include gross salaries and wages, as well as bonuses where they form part of the employee’s earnings and relate to their involvement in qualifying R&D activity. Employer’s Class 1 National Insurance Contributions (NIC) and pension contributions can also be included, provided they relate to the qualifying work undertaken.

It is important to ensure that only members of staff who were directly involved in the qualifying R&D activity are included in the claim. This means those contributing to the advancement of knowledge or capability, or those directly supporting the work, such as technical supervision and other qualifying support activities where they are relevant to the R&D process.

Record-keeping is one of the key areas in supporting an R&D claim. HMRC expects companies to retain evidential documentation of staff time and expenditure apportionment. This may include:

• PAYE records
• Timesheets
• Employment contracts
• Other internal project documentation

Where exact records are not available, any estimates must be reasonable, consistent and capable of being explained if challenged by HMRC.

If external members of staff were required, such as externally provided workers, also known as EPWs, or specific contractors, a different treatment will apply.

In some cases, companies can include up to 65% of the relevant costs, or a pro rata equivalent based on time spent on qualifying R&D activity. The treatment of these costs will depend on the nature of the arrangements and the applicable R&D tax relief rules. These workers must be directly engaged in the R&D activity, with the company bearing the relevant cost of their work.

A cautious approach should be taken in order to distinguish between genuine R&D activity and general commercial or administrative work.