R&D Tax Incentive explained: Here’s what you can claim

When it comes to tax incentives related to research and development (R&D), there’s a lot of misconception among business founders in relation to whether they could qualify for this funding support or not. 

In fact, many are deterred from applying just because they do not realise that what they do can actually be classified as research, or development.

R&D is much broader than what most people tend to think. It can occur virtually anywhere in any sector — not just deep tech, software development, and biotechnology, but also farming and agriculture, dentistry, construction, architecture, and many more industries. 

The common denominators to look for are the three main guiding questions that will allow you to understand whether if what you’re doing can qualify as R&D:

The three questions

1. Are your staff expanding the technical knowledge on a certain subject — are they are working on something for which the solution couldn’t be googled?

2. Are you bearing a financial risk?

3. Have they undertaken a systematic approach — did your staff assume a certain hypothesis in the beginning and went on to test it/develop a solution to test if it’s true or not?

If your business fills in a certain market gap with a new product, process, application, platform, material, approach, methodology, and you answered “yes”, “to some extent”, or even “maybe” to the above three questions, chances are you’re doing R&D. 

You do not need to be developing completely new solutions — even improvements to existing technology, materials, processes etc. can qualify for the tax incentive. 

Similarly, failed projects can qualify as well — and you can make a claim on the expenditure used up in them.

When it comes to the costs that can be claimed, as a rule of thumb, there are five main categories of costs that form the bulk of the R&D incentive applications.

The five cost categories

1. Salaries and wages

   Direct salaries of people directly involved in the indicated R&D, such as software developers, data scientists, analytics specialists, etc.

   Indirect salaries for managers, executives, project managers who are overseeing the R&D process and/or direct teams.

2. Contractor costs

   Contractors must be based locally in order to qualify their costs. Overseas costs do not qualify.

3. Consumables and utilities

   All the materials, perishables, resources, as well as utilities consumed in the R&D process. This includes:

   • Office rent;
   • Electricity bills;
   • Telephone/internet bills;
   • Computer hire;
   • Travel/accommodation expenses;
   • Vehicle/fuel expenses; or
   • Office supplies.

4. Software licences

   This also includes internet expenses, such as web domain hosting.

5. Other costs

   Other costs can qualify depending on the nature and character of your activities. For example you could claim on a portion of your:

   • Insurance;
   • Cleaning; or
   • Repairs and maintenance expenses.

Linking cost to activity

Each of the above cost categories, and more, can be considered in the R&D Tax Incentive application. How many cost categories we can qualify, and the apportionment of each, boils down to the strength of your application — how well can you explain the link between your cost, and the R&D activity? 

Here’s a number of useful points to consider that will allow you to ensure you can apportion the greatest percentage of your costs, and qualify most cost categories into your claim.

What you need to track

1. How detailed are your contractor invoices? 

   Do they clearly state the nature of the work carried out? 

   Are each of the invoice line items clear and easy to understand in terms of the assumed R&D projects?

2. Where are you carrying out your R&D project?

   Do you have a designated office space? 

   If yes, do you collect and track all your payments for the office rent/electricity/other bills?

3. How many of your staff partake in the assumed R&D activities?

   Do you have a single file to store all of their payslips, bonuses, overtime payments?

   Do you have a clear description of their job roles to ascertain what percentage of their time can be allocated as R&D cost?

   Do your staff keep timesheets, job logs, or any other trackers to allow you to understand what percentage of their time is spent on R&D?

Understanding the above will give you a much clearer picture of how your activities could fall within the eligibility criteria for the R&D Tax Incentive. With that in mind, you will be able to have a productive discussion with an R&D consultant to assess the scope of your potential claim. 

It’s good practice to speak with a specialist first to confirm your eligibility before taking on the application work, which can be lengthy and quite complex.