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HMRC internal manual

Corporate Intangibles Research and Development Manual

HM Revenue & Customs
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R&D tax relief: categories of qualifying expenditure: staffing costs - measure of


The measure of staffing costs in respect of employees engaged directly in R&D activities for the directors and employees is given by adding:

  • the emoluments paid by the company to its directors or employees including all salaries, wages, perquisites and profits whatsoever, other than benefits in kind, and
  • the secondary class 1 national insurance contributions paid by the company, and
  • the contributions paid by the company to any pension fund operated for the benefit of the directors or employees

Section 27 of FA 2008 - now incorporated at CTA09/S1123(5) - extends the definition of staff costs to include compulsory contributions paid by the company in respect of benefits for directors and employees of the company under the social security legislation of all European Economic Area (EEA) States (excluding the UK, as CTA09/S1123 already provides for relief for UK compulsory contributions in the form of secondary class 1 NICs) but including Switzerland.

This extension will enable companies to claim R&D relief in respect of certain social security costs they incur on or after 1 August 2008 in respect of staff they employ in other EEA States and Switzerland. Although Switzerland is not an EEA State it has signed up to the EC social security legislation in order to ensure the free movement of people across its borders.

The range and variety of social security benefits available across the EC is very wide and the S1123(5) extension is meant to give relief only in respect of compulsory contributions similar to the UK’s Class 1 NICs. The EC Regulation No 883/2004 contains at Article 3(1) a list of legislation and compulsory contributions made in respect of that legislation will now attract R&D relief.

Companies with staff in other EEA States or Switzerland will be aware of which contributions are compulsory and which are not under the rules of each particular EEA State and the extension of the relief should cause very few problems in practice. However, if areas of dispute arise as to whether or not a particular contribution is compulsory referral should be made to CTISA.

In CTA09/S1123(2) & (3) the exclusion of benefits in kind applies to all benefits provided in a non-cash way. So, car and fuel benefits, living accommodation, vouchers and the like, are all excluded. Cash reimbursements of expenses or other reimbursements with salary are not excluded. Expenditure is reimbursed if the cost is initially borne by the employee. So, for example, expenditure incurred by an employee using a credit card in the name of the company would not be reimbursed expenditure because the cost was not initially borne by the employee.

But for benefits in kind paid in accounting periods ending on or after 6 April 2003, but incurred prior to 1 April 2004 see CIRD83250.

Redundancy payments

In accordance with Nichols v Gibson (68TC611) redundancy payments made by the company are not emoluments and so are not qualifying expenditure.