By Nigel Holmes, Senior Tax Specialist at Catax
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:
It is not our role to advise on these risks. 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. Once again, we are not advisers so 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).
**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%)).