Blog: Tax Talk – Why dividends can’t be included in R&D costs

Date: December 3, 2019

By Nigel Holmes, Head of R&D Technical Operations at Catax


Having been a tax specialist for longer than I care to remember, I know all about remuneration planning. The basic rule is dividends are more tax-efficient than salary because the Income Tax rate is lower on a dividend, nor are they subject to National Insurance, despite the fact they also do not qualify for Corporation Tax relief. So why are we not all paid by dividend, and why does it matter for R&D tax relief claims?

Firstly, dividends are NOT remuneration for services provided. They are a return on profit paid to shareholders. So only shareholders can receive dividends and only from companies with accumulated profits. They must be paid in line with shareholdings too, so a 20% shareholder can only receive 20% of the entire dividend (so-called alphabet shares are often used as a solution to this issue).

Therefore, dividends cannot be included for an R&D claim for a few reasons, mainly:

The next question we are often then asked is whether a company that is carrying out R&D should actually pay dividends instead of qualifying salary. Shareholders carrying out substantial amounts of time on R&D may want to consider switching to paying entirely in salary. As long as the individual has the same post-tax income then the additional Corporation Tax relief generated through R&D will more than outweigh the National Insurance cost at a certain tipping point. Of course, there may be many reasons not to change the remuneration policy and full advice should be sought as to the optimum structure to use.

Reimbursed Expenses

Next up, why is it that reimbursed expenses such as travel and accommodation that relate to the R&D can be allowed as a qualifying cost, yet costs incurred directly by the company cannot?

In this instance, it is purely down to the drafting of the rules as to which costs qualify. When the legislation was drafted, HMRC defined staff costs to include “an amount paid to a director or an employee of the company, other than an amount paid in respect of benefits in kind, if the amount is paid in respect of expenses paid by the director or employee, and the amount is paid because of the director’s or employee’s employment”.

This part of the legislation forms part of the staff costs definition which includes gross pay, employer National Insurance and employer pension. It is not a separate category as such that has been introduced merely to frustrate the claimant company. It is a staff cost.

Some companies may change their expense policy as a result of this, paying for relevant expenses personally and having them reimbursed. This is fine for large amounts, but for smaller amounts the extra administration could outweigh the additional tax relief.

As always, this is a high-level view of two complex situations and full advice should be sought before altering pay and expense policies.


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