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Can you include VAT in an R&D tax credit claim?

Stephen James CTA
Senior Tax Manager

You cannot normally include VAT costs within an R&D tax credit claim. The exception to this rule is if your VAT costs are not recoverable through a VAT return. Whether this applies to you will depend on your VAT classification.

VAT classifications and R&D tax credits

There are four VAT classifications:

  • standard rate (20%)
  • reduced rate (5%)
  • zero rate
  • exempt

If you are classified as standard, reduced or zero rated, you will be able to recover your input VAT (the VAT on your costs) in your VAT return. Therefore, you cannot include VAT costs relevant to your R&D expenditure in your R&D tax credit claim.

However, if you are classified as exempt — like insurance companies for example — your input VAT cannot be recovered in a VAT return. It is therefore part of the goods and services to which it has been charged. In this case, you can include it as part of your R&D tax credit claim.

R&D costs that attract VAT

Expenditure on sub-contractors, materials and utilities could attract VAT. It is therefore important that these are handled correctly according to your VAT classification.

Typically staff costs are the most significant part of an R&D tax credit claim and these do not attract VAT. So in many cases, VAT is not particularly relevant to an R&D tax credit claim.

Expert advice from ForrestBrown

Uncovering the full extent of your R&D expenditure is important to your R&D tax credit claim. Working with a true specialist like us will ensure you have included all your relevant revenue expenditure.

At ForrestBrown, our team of qualified chartered tax advisers and sector specialists uses a robust and continually-improving process to identify qualifying activity and expenditure for our clients. We have proven experience of improving claims made by others. Understanding how to correctly treat your VAT costs will also ensure your claim will stand up to scrutiny by HMRC.

COVID 19 and VAT

Read our blog COVID-19 and the impact for R&D tax credits for details of the VAT deferral offered to businesses as part of the funding measures offered to businesses by the government in the Spring 2020 Budget.