The R&D Tax Incentive: What Expenditure Can You Claim?

As specialists in government funding and tax incentives, NOAH Connect are often asked one key question by businesses: “What expenditure can I claim when applying to the R&D Tax Incentive?” Understanding the ins and outs of the program can be a game-changer for many businesses, and we’re here to help simplify it.

Understanding the R&D Tax Incentive

The Research and Development (R&D) Tax Incentive is a government initiative aimed at encouraging companies to engage in innovative, high-risk activities that might lead to the creation of new knowledge or technologies. This program helps companies to offset some of the costs of their R&D activities by reducing their overall tax liability and, in some cases, even provides a cash injection.

Eligible R&D Expenditure

Typically, the R&D expenditures that can be claimed include:

  • Direct R&D labour costs, including salaries, wages, and on-costs for staff who are directly engaged in eligible R&D activities.
  • Contract expenditure, if you contract others to do R&D on your behalf.
  • Depreciation of depreciating assets used in your R&D activities.
  • Expenditure on consumables directly used in carrying out eligible R&D activities. An adjustment may be required in some cases where you claim feedstock expenditure incurred on R&D activities, when those activities also produce tangible products for supply to someone else, or to be applied to your own use
  • Certain overheads that are apportioned to your R&D activities.

Though the R&D Tax Incentive covers a broad range of expenditures, it’s important to understand that not all types of expenditures qualify. To be eligible, the expenditure must:

  • Be incurred on R&D activities that have been self-assessed as eligible under the legislation;
  • Be incurred by the company itself (not incurred on behalf of another entity);
  • Be claimed in the income year that it is incurred.

Examples of R&D Expenditure Claims

To further clarify, let’s take a look at two different business scenarios and the types of expenditure they claimed.

Software Expenditure R&D Tax Incentive

Example 1: A Technology Startup

A technology startup developing a new software solution. This startup can claim the salaries of its software developers who are directly involved in the R&D of the new technology. It can also claim the cost of cloud computing services used directly in the R&D process as well as a portion of the rent and utilities for the workspace where the R&D activities take place and a portion of technology subscriptions that are necessary to conduct the R&D.

It won’t be able to claim the salary cost of its CFO or office manager, nor overhead costs that would be incurred regardless of the R&D activities taking place, such as Xero accounting software.

Example 2: A Manufacturing Company

Imagine a manufacturing company that is working on developing a new machine for its production facility that can process a wider range of materials. The company can claim the cost of raw materials used in testing and prototyping, the salaries of engineers working on the project, and the depreciation on equipment used in the R&D activities. It can also claim a portion of the rent however should consider the area of use for R&D/total area of the production facility.

It won’t be able to claim the salary costs of non-technical staff, nor overhead costs that are not necessary for the R&D activities to be performed, such as cyber liability or professional indemnity insurance.

Manufacturing Expenditure R&D Tax Incentive

Visit our R&D Tax Incentive Case Studies page for more detailed examples.

What Isn’t Claimable Under the R&D Incentive?

 While the scope of claimable expenditures is broad, some costs don’t qualify. Ineligible expenses include:

  • Routine business expenses, for example salaries for finance, admin and sales staff, marketing costs and overheads that are not related to the R&D
  • Interest expenditure
  • Expenditure that is not at risk, for example if you perform R&D activities as part of a commercial contract you may need to reduce your R&D salary expenditure for those activities by initial scoping fees you receive to start the work, as the fee is received regardless of the results of the R&D activities. By contrast, R&D salary expenditure that you incur to deliver technical milestones would likely be claimable as there is a risk the R&D activities will not be successful, and the customer payments associated with the milestones not received I.e. the R&D salary expenditure is ‘at risk’ to you
  • The cost of core technology that you have purchased or licensed for the purpose of developing it further (although the costs associated with further developing the core technology may be eligible)
  • Expenditure included in the cost of a depreciating asset (although as noted above you can claim decline in value, or depreciation amounts)
  • Expenditure incurred to acquire or construct a building

Conclusion: Maximising Your R&D Tax Incentive Claim

Clearly, the R&D Tax Incentive can cover a broad range of expenditures, but understanding and identifying these can be complex. Remember, the key to a successful R&D Tax Incentive claim is proper documentation and understanding of eligible expenses. If you’re unsure about any aspect of your claim, don’t hesitate to reach out to our team for professional advice tailored to your business’s unique needs and circumstances.