A great deal of the money businesses spend in pursuit of Research & Development (R&D) will incur VAT.\r\nThough it\u2019s not normally the case, accountants need to be alert to when VAT payments can be included in the qualifying costs of an R&D tax relief claim. This can have a significant impact on the tax benefit that affected companies ultimately receive.\r\nIn this article, we take a closer look at how a company's VAT classification can impact its R&D claim.\r\n\r\nThe basic position\r\nWhen making an R&D tax relief claim, the amount of tax relief a company is entitled to depends on two main factors. Firstly, how much of their outlay is incurred in carrying out eligible activities \u2014 known as \u2018qualifying expenditure\u2019. Secondly, their broader tax position.\r\nQualifying expenditure can only include revenue expenditure items, which means they are costs that are deductible for Corporation Tax purposes. These qualifying expenditures typically fall under one of the following categories:\r\n- Staff costs and reimbursed expenditure\r\n- Subcontractors & Externally Provided Workers (EPWs)\r\n- Consumables\r\n- Software\r\n- Payments to Clinical Trial Volunteers\r\nWhile staff costs do not generally attract VAT, the rest usually do. This is important for those companies that are VAT exempt, because they are not allowed to recover the VAT on their expenditure. These companies \u2014 unlike businesses that do charge VAT on goods and services and can claim back the VAT \u2014 may be able to include the VAT amounts paid out as part of their qualifying expenditure within an R&D tax relief claim.\r\nThis will only affect a minority of companies but, for those who are impacted, the increase in benefit can be significant. Examples of industries where businesses are more likely to be VAT exempt are:\r\n\r\n\r\n \t\r\ninsurance firms\r\n\r\n \t\r\nfinance and credit providers\r\n\r\n \t\r\nhealthcare companies providing medical, optician and dental care\r\n\r\n \t\r\ncompanies providing education and training\r\n\r\n \t\r\nbusinesses involved in selling, leasing and letting commercial land and buildings\r\n\r\n\r\nA further complication\r\nThe impact of VAT on an R&D claim doesn\u2019t stop there. Any outstanding VAT liabilities owed to HMRC can also affect the cash repayment due following a successful claim. And while\u00a0 VAT deferrals \u2014 typically as part of the Government\u2019s COVID-19 package of support measures \u2014 aren\u2019t classified as tax owed, Time To Pay (TTP) arrangements are considered to be tax owed and any R&D tax credit will be offset against the latter before being paid.\r\nStaying on top of these rules will ensure a client does not risk over paying or under claiming.\r\nMehul Kyprianou\u2011Chavda is an R&D Tax Manager at business tax relief consultancy Catax. He can be contacted at firstname.lastname@example.org.