23RD MAY, 2023

Cost Tracking for R&D Projects: Best Practices

In this blog post, we aim to provide valuable insights into managing and documenting costs associated with Research and Development (R&D) projects. Our purpose is to empower UK Small and Medium Enterprises (SMEs) and small businesses with the necessary tools and knowledge to maximise their R&D tax relief claims.

Accurate cost tracking plays a crucial role in securing R&D tax credits, and we want to emphasise its importance. We will begin by laying the foundation on the significance of cost tracking in R&D projects and its connection to R&D tax relief. We will explain the potential financial benefits of R&D tax credits available for UK SMEs and small businesses.

Subsequently, we will provide a comprehensive overview of the types of costs that qualify for R&D tax credits in the UK. Our readers will gain a clear understanding of these qualifying expenses, allowing them to facilitate accurate record keeping and maximise their potential claims. Furthermore, we will help SMEs avoid common mistakes in R&D cost tracking and provide practical advice. We will also provide a step-by-step guide on leveraging cost tracking records while applying for R&D tax credits.

Lastly, we will demonstrate how hiring a specialist like Tax Cloud can simplify the R&D tax credit claim process, provide expert guidance, and potentially enhance the success of such claims.

Understanding the Importance of Cost Tracking in R&D

Effective cost tracking is vital in research and development (R&D) projects as it enables businesses to keep track of their expenses and maximise their potential for R&D tax credits. Accurate cost tracking gives insight into the detailed costs of an R&D project, enabling businesses to justify and claim eligible expenses.

Without accurate cost tracking, businesses run the risk of missing out on valuable tax credits or incurring inaccuracies that could lead to a claim being challenged. In addition, cost tracking allows businesses to monitor their progress, make budget adjustments, plan future projects, and assess the success of their R&D investment.

Accurate cost tracking plays a crucial role in successful R&D tax credit claims, by maintaining detailed records of all eligible expenses, businesses can effectively demonstrate to HM Revenue and Customs that they have expended time, money, and effort on qualifying R&D activities. It provides HMRC with the necessary data to evaluate if the activity meets the criteria for R&D tax credits. The absence of such data and documentation can result in a reduced or rejected claim, as well as possible audits.

Ultimately, cost tracking is an essential element of R&D tax credit claims, and its value cannot be underestimated. By keeping meticulous records, businesses can achieve more accurate claims and reduce the burdens of their R&D tax relief claim process.

Overview of R&D Tax Credits for UK SMEs

UK SMEs and small businesses can benefit significantly from the R&D tax credit scheme that is designed to encourage innovation and research within the country. In the past, SMEs could claim back up to 33% of the amount they’ve spent on qualifying R&D. However, From the 1st April 2023 this will reduce to a maximum of 18.6% for loss making companies, increasing to 27% if the company is R&D intensive (defined as their qualifying expenditure represents 40% or more of their total expenditure).

The tax credits are a valuable source of funding for small businesses, particularly those in the early stages of development, as they can help to offset research costs and free up capital to invest in further growth.

To qualify for the R&D tax credit, a business must be able to demonstrate that its project involves scientific or technological innovation, and that it is engaging in activities that aim to advance knowledge or create new products, processes or services. The project must also involve some degree of uncertainty, and the business must have attempted to overcome this uncertainty through research and experimentation.

Cost tracking plays an essential role in securing R&D tax credits, as it allows businesses to accurately document their R&D expenditure and provide evidence to support their claim. Accurate record-keeping is critical, and businesses must ensure that they have a system in place to track all relevant expenses, such as staff costs, consumables, subcontractor costs, and software. Using suitable project management and accounting software can help businesses to record and categorise their expenditure accurately.

R&D tax credits are a valuable source of funding that can help UK SMEs and small businesses to offset the costs associated with research and innovation. By tracking their R&D expenditure accurately and providing evidence to support their claim, businesses can increase their chances of securing this funding, helping to drive growth and innovation within the UK business landscape.

What Costs Qualify for R&D Tax Credits

In the UK, several types of costs qualify for Research and Development (R&D) tax credits, making accurate cost tracking a crucial component of R&D projects. Staff costs are considered a significant contributor to R&D development, including salaries, wages, bonuses, and employer contributions to National Insurance and pension schemes.

Subcontractor costs also qualify for R&D tax credits, covering payments made to external businesses or individuals who provide specialist services related to R&D development. Software and consumables used specifically for R&D activities, such as prototype materials and laboratory equipment, are also considered eligible costs. Additionally, overheads like utility bills, rent, and rates are included to document indirect costs associated with R&D projects.

📖Read our article on What Costs Can Be Claimed Through R&D Tax Credits 📖

It is essential to maintain accurate and detailed records of all qualifying expenditure and demonstrate that the costs were genuinely incurred for R&D purposes to increase the chances of a successful R&D tax relief claim. By understanding the categories of eligible expenses, businesses can ensure that they track costs correctly and potentially maximise their R&D tax credit claim.

A thorough understanding of the qualifying expenses can also enable companies to plan their budgets and identify areas where they may need additional funding or support.

Best Practices for Cost Tracking in R&D Projects

Best practices for cost tracking are crucial for R&D projects as they can increase the likelihood of successful R&D tax credit claims. To ensure efficient cost tracking, it is vital to start early and maintain consistency in records. This can be achieved by dedicating a team or a project manager who can regularly keep track of expenses.

Additionally, using appropriate project management and accounting software can automate the recording process and reduce the likelihood of errors that can affect the overall claim.

Documenting indirect costs such as rent, utilities, and overheads is also essential as they are often missed by businesses while claiming R&D tax relief. Keeping regular reviews and updates is equally important as it can help to identify potential discrepancies that can affect the claim. It can also facilitate efficient and accurate record-keeping that will ultimately maximise the potential claim amount.

Another best practice is to ensure that all costs being claimed are qualifying expenses that comply with the HMRC guidelines. This includes costs such as staff, subcontractors, software, and consumables. Misinterpreting what constitutes R&D and what qualifies as qualifying expenses can lead to potential rejections or inaccuracies in the claim.

Common Mistakes in R&D Cost Tracking and How to Avoid Them

Despite the importance of tracking costs accurately in R&D projects, the process is not always straightforward.

Many businesses face common mistakes that can hinder their R&D tax credit claims. One common mistake is starting tracking too late in the project, leading to incomplete records and missed expenses. Additionally, failing to keep consistent records can generate errors and increase the likelihood of human errors. Therefore, starting early and maintaining consistent records are crucial best practices for cost tracking in R&D projects.

Another mistake that businesses commonly make is overlooking indirect costs, such as rent, utilities, and depreciation. These expenses may seem insignificant but can add up significantly over a project's course, decreasing the total R&D claim amount. It's important to document these indirect costs rigorously and include them in the claim application.

Using unsuitable project management and accounting software is another pitfall that businesses can encounter. Using manual or outdated software can lead to disorganised and inaccurate records. Choosing project management and accounting software that caters to the company's unique requirements and accommodates R&D cost tracking needs can be a worthwhile investment.

Finally, submitting incorrect or incomplete information during the application process can result in delayed or excluded expenses. It's essential to review and update the records regularly and ensure that all relevant expenses are correctly entered to minimise the risk of mistakes.

By mitigating these common mistakes, businesses can optimise their cost tracking in R&D projects and maximise their R&D claim amount. Hiring a reliable R&D tax credit specialist like Tax Cloud can also offer additional support and guidance to avoid these pitfalls and benefit from R&D tax relief.

How to Use Cost Tracking to Prepare for R&D Tax Credit Claims

To prepare for R&D tax credit claims, using cost tracking records is vital. Firstly, make sure all costs related to the R&D project are accurately documented and categorised based on the qualifying expenses for R&D tax credits, such as staff costs, subcontractor costs, software, and consumables. Keep in mind that any costs that are not directly related to the R&D project cannot be included in the claim.

Next, identify the eligible percentage of the costs by reviewing the relevant guidance for your business sector. 

After that, calculate the total amount of eligible costs and the corresponding tax relief amount you can claim. This is where cost tracking tools come in handy as they automate the calculation process and ensure accurate records are kept.

Once the calculations are finalised, document all the relevant information needed for the R&D claim, including the project description, project timeline, total eligible expenses, eligible percentage, and corresponding tax relief amount.

It is also recommended to review and update cost tracking records regularly throughout the R&D project, ensuring that there is consistency in the records and any changes are accurately reflected.

Submitting the R&D tax relief claim requires supporting documents to be provided that outline the project's objectives and achievements.

Having accurate cost tracking records can make the filing process more efficient and straightforward, allowing businesses to focus on the project's research and development rather than worrying about the claim's complexities.

By implementing good cost tracking practices, businesses can leverage tax credits to promote innovation, growth, and success.

How a Specialist Can Help

Working with a specialist such as Tax Cloud can be a game-changer for SMEs looking to maximise their R&D tax credit claims.

Tax Cloud provides a user-friendly platform that simplifies the process of documenting costs associated with R&D activities. The platform enables businesses to prepare a maximised and robust R&D tax claim precisely, and Tax Cloud's R&D tax specialists can guide SMEs through the process, helping them make the most of their R&D activities financially.

By providing regular updates on any changes in legislation and the latest R&D tax relief guidelines, Our specialists keep SMEs up-to-date and informed, ensuring they're not left behind in the competitive business landscape. Tax Cloud specialists also have years of experience working with SMEs, so they know precisely what to look for when it comes to identifying qualifying expenses, which could drastically improve the R&D tax relief claims of SMEs.

Partnering with Tax Cloud means that SMEs can benefit from expert guidance and support throughout the R&D tax claim process. Additionally, Tax Cloud's no-win, no-fee service means that businesses do not pay a penny if their claim is unsuccessful. With the help of a specialist R&D tax team, businesses can be sure that they're maximising the potential of their R&D tax claims and contributing to their long-term growth and success.

Conclusion

In conclusion, this blog post has provided UK SMEs and small businesses with valuable insights into managing and documenting costs associated with R&D projects. We have elaborated on the importance of diligent cost tracking in the context of R&D activities and illustrated its significant role in securing R&D tax credits.

To reiterate the key points discussed, first, we highlighted the importance of cost tracking in R&D projects and its connection to R&D tax relief. Next, we provided an overview of R&D tax credits available for UK SMEs and small businesses, enabling businesses to appreciate the worth of efficient cost tracking. We then proceeded to guide the reader through the types of costs that qualify for R&D tax credits in the UK and discussed the best practices for cost tracking in R&D projects, including common mistakes to avoid.

We have also provided a step-by-step guide on utilising cost tracking records while applying for R&D tax credits, thereby helping businesses navigate the claim process more easily. Finally, we demonstrated how hiring a specialist like Tax Cloud can simplify the process, provide expert guidance, and potentially enhance the success of R&D tax credit claims.

We encourage UK SMEs and small businesses to employ these best practices in their R&D projects, to maximise their financial benefits and promote innovation, growth, and success in the UK business landscape. By employing these practices, businesses can ensure a streamlined and efficient R&D costs and tax credit claim process.

We look forward to engaging with businesses who wish to explore the benefits of R&D tax relief and develop fruitful partnerships in the future.

Get in touch

Are you a UK SME or small business undertaking R&D activities? Are you sure you're maximising your claim for R&D tax relief? Tax Cloud can help! As a specialist in R&D tax credits, we offer expert guidance and support to ensure your cost tracking is accurate, complete, and compliant. Our team of professionals can provide you with a free consultation or more information about our services related to R&D tax credits.

With Tax Cloud by your side, you can unlock the true potential of your R&D efforts and avail the financial benefits you deserve. 

If you would like to discuss any aspect of R&D Tax Credits or the Tax Cloud portal, feel free to contact our friendly expert team on 020 7360 4437 or send us a message.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Myriad Associates are the creators of Tax Cloud, we help enterprises navigate, apply and secure tax incentives and grants. We specialise in R&D Tax Credits, Creative Tax Reliefs, Innovate UK grants, Horizons Europe grants, and R&D Capital Allowance Claims.

  • Submitting R&D tax claims since 2001
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Meet some of the team behind Tax Cloud

Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
Jillian Chambers Jillian Chambers Technical Analyst/Writer
Lauren Olson Lauren Olson Technical Analyst Manager
Rabia Mohammad Rabia Mohammad Corporate Tax Associate