You cannot normally include VAT costs within an R&D tax credit claim. The exception to this is if your VAT costs are not recoverable through a VAT return. This 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
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 as part of your R&D tax credit claim.
However, if you are classified as exempt (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 circumstance, 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 will ensure your R&D tax credit claim is fully maximised – so it’s important to make sure you have included all your relevant revenue expenditure.
At ForrestBrown, our team of qualified chartered tax advisers and industry specialists use our robust processes to identify more qualifying activity and expenditure for our clients. We have proven experience of increasing the size of claims made by others. Understanding how to correctly treat your VAT costs also ensures your claim will stand up to scrutiny by HMRC.
To talk with an expert about your eligibility for R&D tax credits, or to have your claim reviewed, get in touch today.