You need to allocate your employees’ time on a just and reasonable basis. It should reflect the amount of time they have spent on qualifying research and development (R&D) development activity with regard to the R&D project boundaries. Your allocation should be supported, where possible, by contemporaneous records.
Your staff costs are classed as qualifying expenditure for R&D tax credits. But only staff costs of directors and employees who are directly engaged in relevant R&D projects will be classed as ‘ directly qualifying’.
If a proportion of your directors’ or employees’ work constitutes direct and active engagement in relevant R&D, you can include the relative proportion of their time (and cost) in your claim.
Direct and indirect staff costs
Qualifying staffing costs fall into two categories:
- activities which directly contribute to the resolution of technological uncertainty;
- and, qualifying indirect activities (‘QIAs’).
The allocation of an employee’s time should reflect the amount of time they have spent on qualifying R&D activities during the claim period.
When trying to allocate an employee’s time, ask yourself the following:
- What qualifying R&D projects did the employee work on during the year?
- On each of these projects, what qualifying R&D activities did the employee undertake?
- What proportion of the employee’s total time did these activities take?
Record-keeping for staff costs
In practice, not all companies keep detailed records of time spent on R&D projects and activities, as commercially this can be an onerous process to implement. In addition, many first-time claimants will be making a claim for projects carried out prior to them even becoming aware of R&D tax credits. Companies identifying a project after its commencement must be aware of rules on claim notification.
While there are no specific record-keeping requirements for R&D tax-relief claims, HMRC has published guidance (GfC3) which sets clear expectations for companies seeking to claim R&D tax relief. Within this guidance there is further detail on the records HMRC may expect a company to be able to provide and how to evidence the assessment being made. While this is only guidance that a company should work to achieve, as with other entries on the Company Tax Return, the general requirement to keep sufficient records to support entries still applies.
On a practical level, this means that HMRC generally accepts that first-time claimants may not have detailed contemporaneous records. In this case, you should take a pragmatic approach to apportioning your employees’ time. But bear in mind that your staff allocations need to be based on prudent judgements and be supported by some evidence.
On a year-on-year basis, HMRC expects you to proactively review, identify, and implement processes which produce records to support your staff apportionments. Where possible, these records should be produced contemporaneously.
In terms of implementing specific R&D record-keeping processes, what is appropriate and realistic will depend on your individual circumstances. And one common solution is timesheet records.
However, timesheets are not infallible and may not be the most appropriate measure for your business. Any staff apportionments must be examined on a case-by-case basis to ensure that they accurately reflect the given staff member’s R&D activity. This proactive analysis should continue for as long as you continue to submit R&D claims.