What Are the Ineligible Expenses & Expenditures Pertaining to the R&D Tax Incentive?

February 15th, 2016

TaxIf you are a firm who uses technology as a foundation for creating new or improved products or services – and the development involves investing in a degree of experimentation or prototyping – there’s a high likelihood you may be eligible for the R&D Tax Incentive.

However, the fact remains that there is still quite a bit of confusion around what can and cannot be claimed. In one of our previous posts, we discussed what the ‘non core’ R&D Tax Incentive activities were. In this post, we look into what is considered ineligible expenses and expenditure.

When claiming for the R&D tax incentive, the following expenses are unlikely to have a link to R&D activities and thus considered ineligible expenses. Typically, these activities would relate to general company operating expenditure that the company would undertake regardless of R&D activities.  Furthermore, there is also ineligible expenditure which cannot be notionally deducted under the R&D Tax Incentive. Please see the lists below to find out what expenses and expenditure is considered ineligible.

 Ineligible Expenses

  • advertising (for instance, of a company’s product)
  • audit fees
  • bad debts
  • company establishment and other fees incurred under the companies code in relation to the administration of the company
  • costs incurred in preparing taxation returns
  • decline in value of a depreciating asset
  • directors’ fees
  • distribution and selling expenses
  • donations
  • employee benefits such as canteen and recreational facilities
  • entertainment expenses
  • grounds and garden maintenance costs
  • insurance premiums on matters unrelated to R&D such as loss of profits and product liability
  • legal expenses not associated with any approved research project, for example, legal expenses for a patent search before undertaking a research project or in taking out a patent after a successful project
  • patents and trademarks in marketing a new product or technology, or as a result of R&D activity
  • rent paid for premises that are not used in R&D activities
  • salaries, associated costs and on-costs of support staff not linked with R&D activities and of staff employed in areas such as distribution, sales, marketing and debt collection
  • tender costs

 Ineligible Expenditure

  • interest expenditure (within the meaning of interest in the withholding tax rules)
  • expenditure that is not at risk
  • core technology expenditure
  • expenditure included in the cost of a depreciating asset (decline in value notional deductions may apply however)
  • expenditure incurred to acquire or construct a building (or part of a building or an extension, alteration or improvement to a building).

Undeniably, the rules and regulations surrounding the R&D tax incentive may be bewildering for some. Hence, a company may wish to seek external assistance to help identity their R&D eligible activities. Many accountants are not acquainted with the ins-and-outs of the R&D Tax, thus you may wish to consider a consultant that specialises in the area. Swanson Reed is a registered tax agent specialising in the R&D Tax Incentive – contact us today to discuss your eligibility and learn more about how the R&D Tax Incentive may benefit your business.