Staff costs and R&D
The most common qualifying cost we see in a research & development (R&D) tax relief claim is, of course, staff costs. As a reminder, this is the R&D proportion of gross pay through the payroll, together with proportional amounts of employers National Insurance, employers pension contributions**, as well as reimbursed expenses that relate to the R&D (not claimable if these costs are paid direct by the company, a strange quirk in the rules).
However, there are two common issues we see when dealing with staff costs:
1. It is common practice for shareholder directors to remunerate themselves through a small salary, which does not trigger a National Insurance liability, and the remainder through dividends. This carries risks – a dividend is not a reward for effort but a return on profit and may be seen by HMRC as akin to a salary and therefore should be taxed as such.
Even if structured well, this may not be the most tax efficient way to draw remuneration. For shareholders actively involved in R&D then the additional corporation tax relief from an R&D claim may more than compensate for the additional National Insurance cost.
Roughly speaking, shareholders spending 70% or more of their time in R&D may be better with 100% salary as opposed to dividends. Full advice should be taken as there may be other reasons why a dividend is preferred or other shareholders to consider (dividends are paid in proportion to shareholdings of a particular share class).
2. For start-ups in particular, often individuals do not match their R&D effort with an appropriate cost charge. As R&D tax relief works on an uplift in a cost, there has to be a cost to make a claim.
Even if cash flow does not allow a salary to be drawn, it is still possible to charge a salary through the books and through a PAYE scheme to be pulled when cash flow allows (it creates a loan to the individual in the accounting records). This, at least, provides a cost to qualify for R&D tax relief, however small.
**As most businesses are now within auto-enrolment we expect to see a greater amount of employer pension contributions being claimed for R&D. This, at least, goes some way to offset this additional cost for employers. Even large one-off contributions count.
So let’s say a shareholder or director was spending 50% of their time on R&D. The small salary or remainder dividend structure is probably still best in this instance but an additional £40,000 pension contribution would attract tax relief of £66,000 ((£40,000 x 100%) + (£40,000 x 50% x 130%)).