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Understanding Indirect R&D Activities for R&D Tax Credits

The UK’s R&D tax relief scheme is a great incentive for innovative companies to claim back some of their costs on risky research and development. Businesses can claim on work that directly contributes to resolving scientific or technological uncertainty.

However, not all activities in an R&D project are directly related to R&D. HMRC has a provision for some indirect R&D to be included; this is called “qualifying indirect activities”.

With a heavier emphasis on compliance in recent years, businesses need to carefully assess their activities to make sure they only claim qualifying R&D.

Direct activities, or core R&D activities, are wholly linked to the R&D project’s goals. These activities are typically carried out by scientists, researchers, engineers, and technicians involved in designing and developing new products or processes. They are required to actually carry out the scientific or technological goals of the project.

On the other hand, indirect activities support core R&D activities but are not directly linked to the R&D itself. Administrative staff and support teams typically carry out these activities. Though many business activities are indirectly necessary for R&D (e.g., payroll or building maintenance), only some are “qualifying indirect activities”.

The main difference between direct and qualifying indirect activities is that direct activities are considered essential to the R&D process, while indirect activities are supportive.

One of the recent changes to the R&D tax schemes is the introduction of the Additional Information Form (AIF), which requires companies to specify the amount of direct versus indirect costs claimed. For companies wishing to claim R&D tax credits, it is essential to understand both direct and indirect activities that qualify for relief under the scheme.

HMRC has published a list of the qualifying indirect activities to guide claimants in making a valid claim. It’s important to know exactly what can be claimed when including supportive work.

1. Scientific and Technical Information Services

Scientific and technical information services to support an R&D project are regarded as qualifying indirect R&D. This includes tasks such as compiling, analysing, and preparing original reports that document the findings of R&D endeavours.

Although this reporting may not be a direct part of the experimentation or innovation process, it plays a critical role in formalising and disseminating the knowledge generated through R&D.

2. Indirect Supporting Activities

Specific maintenance, security, administration, and clerical duties can be included, so long as they relate to R&D. This may involve administrative management, finance, and human resources services for employees engaged in R&D efforts. Financial activities related to budgeting and financial oversight, as well as personnel tasks associated with the recruitment and management of R&D personnel, are qualifying indirect supporting activities.

However, you cannot claim for support work that would have been done anyway, like the normal costs of managing payroll. The same goes for maintenance that is not completed for the R&D project but for the normal running of the company, like a company-wide IT update or security for company-wide facilities.

3. Ancillary Activities Essential to R&D

Ancillary activities include leasing and maintaining laboratories for R&D use, maintaining R&D equipment (such as specialised research tools and computers), and hiring and paying staff specifically for R&D-related tasks. These activities are essential since, without well-maintained equipment, laboratories, or appropriately staffed teams, the core R&D work could not proceed effectively.

However, as above, any costs that would’ve been incurred with or without the R&D project cannot be included. Leasing an office space that is not specific to R&D or cleaning and maintaining non-specialised facilities and machinery cannot be included, as they would’ve happened either way.

4. Training for R&D Support

R&D projects often require personnel with specialised skills and knowledge. Training programs to equip staff with the knowledge required to support R&D work directly are recognised as an indirect R&D activity. This can include specific technical training needed to operate R&D equipment, use scientific software, or gain new methodologies essential to the project.

5. University Research

The collaboration between academic institutions and companies engaged in innovation is recognised as qualifying indirect activity. Research carried out by students and researchers at universities can be included in a claim.

6. Devising New Scientific or Technological Methods

Another key indirect R&D activity is research to develop new testing, survey, or sampling methods. While these methods may not constitute R&D in their own right, their development is crucial for the R&D project. For instance, creating new ways to measure or assess the results of R&D efforts could be essential for the successful execution of the project.

7. Feasibility Studies

Feasibility studies carried out to guide the strategic direction of an R&D project are also deemed as indirect R&D activities. These studies evaluate the viability of a line of research or innovation.

Such studies typically encompass initial enquiries that steer the decision-making process in subsequent, more concentrated R&D efforts. In themselves, they may not involve work that overcomes the uncertainty, but they lay the foundation for that work.

One of the most common challenges in identifying qualifying indirect activities is working out which activities are genuinely necessary for the success of your R&D project. It is essential to have a clear understanding of your R&D project goals and to focus on the activities that directly relate to those goals. To this end, finance personnel may need input from the project team to establish the advance and uncertainties, to know which activities actually impact the R&D.

Another challenge when identifying qualifying indirect activities is justifying them. To overcome this, be sure to document each activity thoroughly and provide a clear rationale for its relevance to your R&D project.

To identify your qualifying indirect activities, start by reviewing your staff, subcontractors and/or EPWs that are at all related, directly or indirectly, to your R&D efforts. Once you’ve got your list of people, work out who worked directly on the R&D projects and who may be indirectly related. With the latter list, go person by person and establish if they can be matched to any of the categories listed above.

Indirect R&D activities support the broader R&D process and are eligible for tax relief under specific conditions. Even if they do not directly contribute to solving scientific or technological uncertainty, they ensure that R&D projects can be successfully carried out. By understanding what qualifies, businesses can maximise the benefits of the R&D tax relief scheme, ensuring that they receive the full amount they are entitled to.

If you have any questions about specific activities, don’t hesitate to get in touch with the experts. Tax Cloud is an online portal for submitting R&D tax credit claims, with reviews and guidance from the team at Myriad. We make it our job to check your costs are eligible and support your claim from project identification to submission to HMRC.