Which staff costs can I include in an R&D claim?

What goes into the figure

Earnings. Salaries, wages, overtime, commission, bonuses — the statutory phrase is emoluments, meaning salaries, wages, perquisites and profits whatsoever other than benefits in kind. Bonuses count where they can properly be attributed to the person’s R&D work under the attribution rules, so a bonus paid for delivering the R&D project is in, and a discretionary company-wide bonus is harder to place.

Reimbursed expenses. Expenses the employee paid out of their own pocket and you refunded qualify as staffing costs where two things are true: the expense is an expense to the company of employing staff, and it is one the employee paid to fulfil the requirements of their employment. Travel and subsistence incurred in doing the R&D is the main case — a researcher’s rail fare to a project meeting, a technician’s hotel while commissioning a rig on a client site.

Three limits on this, and the first one catches people out:

• The employee has to have borne the cost first. If the same journey goes on a company credit card, or the company books and pays the hotel directly, it is not reimbursed expenditure, and it does not qualify — there is no category it falls into. The identical cost qualifies or does not depending on whose card paid for it.
• It has to be a cost of employing someone, not a cost of running the project. Hiring a meeting room and repairing a building are not costs of employing staff even where an employee paid for them and was refunded.
• Home-to-work travel, training course fees and travel to board meetings do not qualify under the ordinary employment principles.

The reimbursement is then apportioned like any other staffing cost, to the person’s qualifying R&D time.

Employer’s secondary Class 1 National Insurance contributions. The employer’s contributions on the qualifying earnings. Not the employee’s primary contributions, which are already part of their earnings.

Employer pension contributions. Contributions to a pension fund held for the benefit of the director or employee. Compulsory social security contributions for staff employed in EEA states and Switzerland are also within the measure, where they are equivalent to UK Class 1 contributions.

That is the whole of it. Anything that is not one of those four is not a staffing cost, even where it plainly is a cost of employing the person.

What is excluded

• Benefits in kind. Company cars and fuel, private medical cover, living accommodation, vouchers. Excluded whether or not they are taxed on the employee.
• Dividends. A director paid mainly in dividends has a small staffing cost, and no amount of restructuring after the year end changes it.
• Redundancy payments, which are compensation for loss of employment rather than payment for R&D work, along with payments in lieu of notice and garden leave.
• Recruitment agency fees for hiring an R&D employee. The salary qualifies once they start; the fee to find them is not a staffing cost.
• Costs the company paid directly. As above — a company card, a corporate account or a supplier invoice in the company’s name takes the cost outside the reimbursed expenses rule.
• Training course fees, whoever pays them. Time an employee spends on training that directly supports the R&D project is claimable as their staffing cost for that time, because such training is a qualifying indirect activity. The fee paid to the training provider is different and falls into no category, and it does not become claimable by being routed through an employee’s expense claim.

Who counts as directly and actively engaged

Two groups. First, people whose work directly contributes to resolving the scientific or technological uncertainty — designing, building, testing, analysing, and the scientific or technological planning behind it. Second, people carrying out one of the qualifying indirect activities, which is a closed list of seven and includes supporting administration, finance and personnel work, maintaining R&D equipment, recruiting R&D staff, and information services for the project.

Job titles decide nothing. It is a question of fact about the duties actually performed. A technical director who spent the year selling has little qualifying time; a production supervisor seconded onto the rig for four months has a lot.

The critical limit for the second group is that the activity must be identifiable as part of a particular R&D project. General company overhead does not become a qualifying indirect activity because the company does R&D. A payroll clerk who processes the whole company’s payroll is not doing a qualifying indirect activity; the same person spending a fortnight on the R&D team’s recruitment is.

Two roles cause more trouble than the rest:

The competent professional. Their time is almost always qualifying, and their identification is the first step in the claim — see Who counts as a competent professional?.

Owner-managers. Directors of small companies genuinely do split their time between technical leadership and running the business. The technical leadership qualifies; the board meetings, fundraising, and customer meetings do not. This split has to be arrived at honestly and evidenced, because it is the first thing HMRC tests in an enquiry into an owner-managed claim.

Apportioning part-time R&D staff

Where a person is only partly engaged in the R&D, an appropriate proportion of their staffing cost qualifies. Appropriate is doing the work in that sentence: the proportion has to be derived from something, and the something has to survive being asked about a year later.

In descending order of what actually holds up:

1. Contemporaneous time records kept against R&D projects during the period.
2. A contemporaneous record of activity that is not a timesheet but is dated and specific — sprint boards, lab books, project logs, job cards — from which time can be derived.
3. A structured retrospective estimate, made by the competent professional or line manager, project by project and person by person, recorded with its basis and its date, and made as close to the period as possible.
4. A flat percentage across a team or a department. This is not a method. It is a number chosen because nothing better exists, and in an enquiry it is treated that way.

Whichever you use, the same person’s percentage should be explainable against what the business was doing that year. A developer at 95% in a year when the company also shipped three maintenance releases invites a question the claim cannot answer.

Record-keeping methods, including how to move a business from category 4 to category 1 without asking engineers to fill in timesheets, are covered in the record-keeping category.

Staff who are not your employees

Only your own directors and employees are staffing costs.

Group recharges are not staffing costs. Where another group company employs the people and recharges you, that is not your staffing cost, even where the recharge is at cost, and the people work entirely on your R&D. It may qualify as externally provided worker expenditure instead, which carries its own restriction, and the connected-party rules will apply. Groups that employ everyone in a service company and recharge out routinely get this wrong in the claimant’s favour by a large margin.

Someone else operating your payroll changes nothing. If the individuals are your employees, their costs are your staffing costs regardless of whose payroll system pays them.

Self-employed consultants engaged directly are neither staffing costs nor externally provided workers. They are considered contracted-out R&D.

The payment condition

An amount has to be paid before the claim is made. For employees, this generally means it has been received for PAYE purposes; for directors, an amount credited in the company’s accounts or records counts as paid. Unpaid remuneration still outstanding more than nine months after the balance sheet date is relieved only in the period it is actually paid, and it drops out of the claim for the period it was accrued in.

This is the point on which owner-managed claims most often lose a large single number: a director’s bonus voted before year-end to create a claimable cost, never drawn, and claimed anyway.

Position for accounting periods beginning before 1 April 2024

The measure of staffing costs and the directly and actively engaged test are unchanged by the 2024 reforms, and the same rules apply to legacy SME and RDEC claims.

Reimbursed expenses have their own history. HMRC’s published position between October 2014 and October 2016 was that they were not staffing costs. That was revised on 27 October 2016 and treated as a change of interpretation rather than of law, with a window for retrospective claims that closed on 30 April 2018. The position set out above has applied since.

There is one older boundary worth knowing if you are looking at a very old claim or a discovery assessment. For expenditure incurred before 9 April 2003 for large companies, and before 27 September 2003 for SMEs, a stepped rule applied: nothing qualified where the person spent less than 20% of their time on R&D, everything qualified above 80%, and an appropriate proportion applied in between. Straight apportionment replaced it. The 80% rule is still quoted in the market as if it were live; it has not been for over twenty years.