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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. A company may reimburse expenses incurred initially by an employee, and such reimbursement may constitute qualifying staffing costs in the following circumstances:

  • The expense constitutes an expense to the company of employing staff, and
  • The expense is an expense the employee pays in order to fulfil the requirements of her employment.

This does not, however, mean that an expense will automatically qualify as a staffing cost just because an employee has initially incurred that expense.

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 that 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 ever 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 guidance says that the expense is required 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

HMRC’s guidance gives a very reasonable interpretation of the underlying legislation.

Importantly, the guidance 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. 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.

Review your claim to check for untapped value

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 as omitting reimbursed expenses from your R&D tax credit claim can significantly reduce your claim value. 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.

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This article was last updated on 11 November 2019.

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