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

If 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.