Which employee expenses are eligible in an R&D tax credit claim?

Eligibility for employee expenses should be assessed based on the work an individual undertook during the project, not their official job title.

Software developers and engineers are some examples of staff who may have been directly involved in resolving scientific or technological uncertainty.

Staff undertaking qualifying indirect activities could also qualify for R&D tax credits where their work directly aligns with the qualifying criteria set by HMRC.

Maintaining accurate records helps support the qualifying activity and the apportionment of staff time. Businesses should retain any technical documentation that clearly states any project involvement, staff responsibilities and the time apportionment during the project.

From technical meeting notes to project records, these records showcase that the expenditure spent relates to eligible R&D activities undertaken if HMRC requests further information at a later point in the claiming process.

The qualifying employee expenses in an R&D tax credit claim are:

• Gross Salaries & Wages (including bonuses, overtime, and holiday/sick pay)
• Employer’s Class 1 National Insurance contributions (NICs)
• Employer pension contributions

These costs must relate to employees carrying out qualifying direct activities, or qualifying indirect activities that support an eligible R&D project. The project itself must aim to achieve a scientific or technological advancement through the resolution of scientific or technological uncertainty.

Claims should reflect the proportion of time each employee spent on qualifying R&D activities, rather than the total cost of their employment. Businesses should identify which employees were involved in the project, the activities they carried out, and the proportion of time spent on qualifying R&D work.

Various individuals from different areas of your business may be engaged in your R&D activities. It is important to assess each individual’s actual role within a qualifying project, rather than focusing solely on their job title.

To ensure complete compliance and avoid penalties from HMRC, you must remember that not all payroll costs qualify. Even if an employee spends 100% of their time on eligible R&D activities, you must exclude the following costs from your calculation:

• Benefits in Kind (BIKs): Private medical insurance, company cars, and gym memberships cannot be included.
• Dividends: Payments made to director-shareholders instead of a PAYE salary are entirely excluded from staff costs.
• Corporate Support Staff: Payroll, general HR, and corporate finance team costs are excluded, even if they process the payroll or budget for the R&D team.
• Redundancy Payments: Statutory or contractual redundancy costs do not qualify.

An individual’s official designation is less important than determining whether they genuinely carried out qualifying direct or indirect R&D activities. In practice, this can include a wide range of employees involved in resolving scientific or technological uncertainties, or supporting those activities as part of the wider project.

Assessing eligibility for R&D tax credit relief begins by establishing work that relates to your trade and forms part of a specific project seeking a scientific or technological advancement. For a project to qualify as genuine R&D, it must involve scientific or technological uncertainty. The uncertainty must not be something that a competent professional in the relevant field could readily resolve.

Once the qualifying R&D project has been identified, assess the project boundaries and determine the expenditure that can be included within the claim. In many cases, staff expenditure represents the largest area of qualifying cost apportionment, particularly where technical employees have used a substantial amount of their time undertaking genuine R&D activities.

It is important to identify not only staff involved in the project, but also the activities they undertook and the time they dedicated to the qualifying R&D work. This is why maintaining detailed project documentation is recommended. Businesses should keep records such as timesheets, project notes, technical meeting records, and internal reporting where possible.

The more detail that is retained, the easier it is to support the basis of the R&D claim in the event that HMRC requests further information. With this in mind, HMRC recognises that some businesses may not have maintained detailed contemporaneous records. In these cases, reasonable and supportable estimates may still be accepted where they are consistent with the technical narrative and the nature of the work carried out.