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Do employee expenses such as travel and subsistence costs qualify for R&D tax purposes?

by Chris Alderson

Some types of reimbursed expenses can be included in research and development (R&D) tax credit claims. The specific types have recently been clarified by HMRC. The guidance on this subject has been revised several times over the last few years: expenses have been in, out and somewhere in between. A special provision has now been granted for retrospectively amending claims that omitted expenses due to previous HMRC guidance.

So, what has really been going on?

  1. Historically, reimbursed expenses were allowed within an R&D tax credit claim and have been explicitly included in the R&D tax legislation since 2009.
  2. On 8 October 2014 HMRC issued a note saying that staffing costs were intended to cover contractual costs only. Therefore, costs such as travel and subsistence could not be classed as staffing costs in an R&D tax credit claim.
  3. After discussion via its R&D consultative committee, on 27 October 2016 HMRC updated guidance in their online manual to clarify the treatment of reimbursed expenses. This broadly brought their interpretation in line with their initial stance, but without formally retracting the previous guidance of 2014.
  4. On 18 July 2017 HMRC further updated its guidance to include a procedure for amending claims if they were understated because of the 2014 guidance (implicitly accepting that the previous guidance has been retracted).

Let’s have a look at this issue in a bit more detail.

What are reimbursed expenses? – HMRC definition

HMRC provide the following description: “Expenditure is reimbursed if the cost is initially borne by the employee”.

This means if expenditure has been settled directly with the vendor by the company, e.g. expenditure on a company credit card, this is not classed as a reimbursed expense regardless of whether it related to R&D activity. This is because the cost was not initially borne by the employee. This is an important distinction.

So, can reimbursed expenses be included within an R&D tax credit claim? To be allowable, a reimbursed expense must be:

  • Classed as a staffing cost, and
  • Relate directly to R&D activities.

Does the guidance confirm reimbursed expenses are staffing costs?

The current guidance, issued on 27 October 2016, says “the company may reimburse expenses incurred initially by an employee, and such reimbursement may constitute qualifying staffing costs in the following circumstances”:

(a)    The amount is paid in respect of expenses paid by the director or employee, and

(b)     The amount is paid because of the director’s or employee’s employment.

This requires the expense to be incurred in carrying out the job, and therefore does not include travel to work or reimbursed training expenses.

Whilst benefits in kind are specifically excluded as staffing costs, cash reimbursements of expenses or other reimbursements with salary are not excluded.

ForrestBrown’s view on including reimbursed expenses in an R&D tax credit claim

This guidance gives a much more reasonable interpretation of the underlying legislation.

Importantly, the guidance now specifically states that qualifying travel and subsistence expenses paid by the employee, and reimbursed by the employer, are expenses that could qualify as staffing costs. This is a marked change from HMRC’s 2014 position on travel and subsistence. It is the main area in which reimbursed expenses may be included in a claim in the first place.

Examples of reimbursed expenses that can and can’t be included in an R&D tax credit claim

John is the R&D director for a large manufacturing group. One of their factories is in China. John spends £1,000 flying to China, which he does on a quarterly basis to run new product development trials.

Reimbursed expenses that can be included in an R&D tax credit claim

If John initially purchased these flights with his own credit card, rather than purchasing via a company credit card, then they would be an allowable staffing cost.  When the cost of the flight was reimbursed to John, it was an expense to allow him to perform the duties in carrying out his job. As such, it is an allowable staff cost and it relates to R&D activities. Therefore, the flight costs can be included in an R&D tax credit claim.

Reimbursed expenses that can’t be included in an R&D tax credit claim

Whilst in China, the local company arranged a car to collect John from the airport and take him to the factory. In this case, this is not a reimbursed expense because the company arranged the car. Therefore, this expense cannot be included in the R&D tax credit claim.

What does the July 2017 guidance on reimbursed expenses mean for businesses?

The guidance on whether reimbursed expenses can be included in an R&D tax credit claim has not been revised since 27 October 2016. However, now HMRC have effectively accepted that they have changed their interpretation. This gives businesses much more confidence to look at claiming allowable travel and subsistence reimbursements.

Are you a business with significant travel and subsistence costs relating to R&D activities? It is certainly worth understanding your position and whether you will be able to include such reimbursed expenses in future claims.

What to do if you might have understated past R&D tax credit claims

The guidance issued at the end of July acknowledges that some companies may have understated their claims for R&D tax relief as a result of the HMRC guidance provided in 2014.

The good news is it allows companies to amend previously submitted R&D claims beyond the usual timescales. Companies have until 31 January 2018 to do so. To be eligible, the claim must:

  • Have been submitted on, or after, 9 October 2014;
  • Be in respect of accounting periods ending between 9 October 2014 and 31 January 2016; and

R&D tax credit claims, and the level of reimbursed expenses, will vary from one company to the next. Therefore, there is not a threshold figure at which point we can suggest you should resubmit a claim. What we can say is that, if you think it would result in a significant adjustment, then you should explore this option with an expert adviser.

Review your claim to check for untapped value

Has omitting reimbursed expenses from your R&D tax credit claim significantly reduced your claim value between 2014 to 2016? As chartered tax advisers, we routinely enhance the value of an R&D tax credit by identifying untapped value in claims prepared by others. Read an example of this in our SMD case study.

Thorough ForrestBrown methodology doubles R&D tax credit for SMD

Having worked with ForrestBrown we are far more aware of the full extent of our innovation now. We have introduced processes to proactively record relevant costs. This means that for preparing comprehensive future claims, a lot of groundwork has been laid. That’s a great position to be in.
Jamie Turner, Technical Director, SMD

Review your claim

Our claim review is completely free and gives you peace of mind. For advice on whether you should submit an amendment, please do not hesitate to give us a call on 0117 926 9022.

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This article was last updated on 1 August 2018.

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