27TH MARCH, 2023

Understanding Qualifying Indirect Activities for R&D Tax Credits in the UK

R&D tax credits in the UK are a valuable form of financial support for businesses that are engaged in research and development (R&D). It helps to encourage innovation and can enable companies to claim back some of their costs associated with R&D activities. To make sure you get the most out of your R&D tax credit claim, it is essential to understand what constitutes a qualifying indirect activity.

Qualifying indirect activities are important because they can make the difference between a successful claim or not. Therefore, it’s critical for UK companies looking to make an R&D tax credits claim to fully understand what qualifying indirect activities are and which ones can be claimed for.

This blog will provide an overview of all relevant information related to qualifying indirect activities for R&D Tax Credits in the UK. We will explain exactly what they are, why they’re important, and provide examples of specific activities that qualify, as well as discuss other factors that need to be taken into consideration when making a successful claim.

Direct and Indirect Activities: What's the Difference?

Direct and indirect activities are two different types of activities that a UK company can engage in when carrying out research and development projects. Direct activities, also known as core R&D activities, are those that are directly linked to the R&D project itself. These activities are typically carried out by scientists, researchers, engineers and technicians who are directly involved in the design and development of new products or processes. 

In contrast, indirect activities are those that support the core R&D activities but are not directly linked to the R&D project itself. These activities are typically carried out by administrative staff and other support teams, and can include tasks such as data analysis, project management, and even the purchase of materials and equipment. While indirect activities are not always eligible for R&D tax credits, there are certain types of indirect activities that can qualify for relief under the R&D tax credit scheme.

The key difference between direct and indirect activities is that direct activities are seen as essential to the R&D process itself, while indirect activities are viewed as supportive activities. While indirect activities may not be directly linked to the development of new products or processes, they are nevertheless an important part of the R&D process and can help to ensure its success.

Therefore, it's important for UK companies looking to make an R&D tax credits claim to understand both the direct and indirect activities that qualify for relief under the scheme. By doing so, they can ensure that they maximise their tax savings and receive the full benefit of the tax credit scheme.

What are Qualifying Indirect Activities?

Indirect activities are essentially the supporting activities that are carried out to enable the R&D activity or project to take place smoothly. These activities are essential in creating an environment that fosters innovation and enables effective R&D activity. Indirect activities can range from administrative tasks, such as testing and analysis of data, to technical activities such as planning, testing, and applying project management principles. The activities must be essential to the R&D project or activity and must help the project in achieving its objectives.

Some selected examples of indirect activities that can qualify for R&D tax credits include testing and analysing data to identify trends, conducting feasibility studies, developing prototypes, software development, market research, technical design activities, creating of user manuals, and providing technical support. However, indirect activities that are not directly related to an R&D project are not eligible to be claimed.

Indirect activities are essential elements that support the R&D project, and their cost can be significant in the overall budget of the project. Only activities that meet certain criteria can be included in an R&D tax credits claim, and the activities must directly relate to the R&D project. This means that the indirect activities must directly support the R&D project or form a necessary part of its process. It is essential to keep detailed records and accurate accounting to support a tax credits claim as the UK taxes authorities will audit any claims made.

In conclusion, it is critical for UK companies seeking an R&D tax credit claim to understand what qualifying indirect activities are, how they relate to R&D activities, and the examples of activities that qualify. Thus, it is essential to engage an experienced R&D tax advisor to ensure that your company maximises its claim for R&D tax credits. With the right documentation and approach, businesses in the UK can navigate the complex tax incentives and benefit from significant cost savings, helping to drive innovation, and improve their bottom lines.

How to Identify Qualifying Indirect Activities

As discussed, Indirect activities are those that support your R&D project but aren't directly related to the research or development itself. Examples of indirect activities include project management, quality control, data collection and analysis, and training. These activities are critical to the success of your R&D project, but they can also be challenging to identify and justify when it comes to making an R&D tax credits claim.

To identify qualifying indirect activities in your R&D project, start by reviewing your project documentation and identifying any activities that support your research or development efforts. These could include activities related to project planning, risk management, or quality assurance, for example. You should also consider any activities that are necessary for the success of your R&D project, such as data collection, analysis, and management.

One of the most common challenges in identifying qualifying indirect activities is determining which activities are truly necessary for the success of your R&D project. To overcome this challenge, it's essential to have a clear understanding of your project goals and objectives and to focus on the activities that directly support those goals.

Another challenge when identifying qualifying indirect activities is justifying their inclusion in your claim. To overcome this challenge, be sure to document each activity thoroughly and provide a clear rationale for its relevance to your R&D project. Best practices for documenting and justifying indirect activities include keeping detailed records of all project-related activities, documenting any changes to the project plan or scope, and providing clear explanations for why each activity is necessary for the success of your R&D project.

By following these tips and best practices, you can ensure that your claim includes all relevant indirect activities and is supported by robust documentation and justification.

Case Studies: Qualifying Indirect Activities in Action

An example of a UK company successfully claiming R&D tax credits for indirect activities is a software development company. This firm was working on developing a new software application that could enhance the overall user experience. During the R&D process, the company conducted extensive user testing to ensure that the new software met the needs and demands of their clients. They also invested in user training and support, which was essential in ensuring that the software was adopted widely. These indirect activities were crucial in supporting the successful adoption of the new software and allowed the company to claim for the qualifying indirect activities.

This company identified and documented their indirect activities in a systematic and structured manner. They kept detailed records of all activities, including timesheets and budgets, to ensure that they could easily identify which activities were qualifying indirect activities. They engaged with R&D tax credit specialists to help them understand what qualified as indirect activities and how to document them. They also conducted internal audits to ensure that all qualifying indirect activities were accurately recorded, documented and supported.

The companies’ success demonstrates that claiming for qualifying indirect activities requires proactive management, engagement with specialists and a systematic approach to record keeping, documentation and support. Companies looking to claim R&D tax credits should start by identifying what indirect activities they conduct that support or contribute to the R&D process. They should engage with R&D tax credit specialists to help them identify what indirect activities qualify and how to document them accurately. They should also maintain accurate records of all activities, timesheets and budgets to ensure they have the evidence required to support their claim. By adopting these best practices, UK companies can successfully claim for qualifying indirect activities and maximise their R&D tax credit entitlement.

Final thoughts:

In conclusion, understanding qualifying indirect activities is crucial for UK companies looking to make an R&D tax credits claim. As outlined in this blog, indirect activities refer to the supporting research and development that directly contributes to the advancement of a particular project, such as project management and quality control.

It is important to note that failing to properly identify and include qualifying indirect activities can make a significant difference in the success of an R&D tax credits claim. By including these activities in their claim, companies can maximize their return and reinvest in further innovation.

We, therefore, urge companies to review their R&D projects and identify potential indirect activities that may be eligible for a tax credit claim. Doing so will not only ensure that they receive the full amount they are entitled to, but also provide them with the resources to invest in future R&D projects.

In addition to reviewing their projects, companies should also seek professional advice to ensure that their claim meets the necessary requirements and adheres to the applicable tax legislation. This will help them streamline the process and avoid possible issues that could arise during the claim process.

In conclusion, understanding and properly identifying qualifying indirect activities is essential for UK companies seeking to claim R&D tax credits. By doing so, they can benefit from increased tax relief and reinvest in further research and development, contributing to the advancement of their industry and the UK economy as a whole.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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