If you run a marketing, digital, or creative agency, you have probably heard that R&D tax credits are available for software development, process innovation, and technical problem-solving. What you might not know is how to handle the staff time element. HMRC requires you to apportion time accurately between qualifying R&D activities and everything else. Get this wrong, and your claim gets rejected or, worse, investigated.
This article explains exactly how to apportion staff time on R&D for an agency claim, using real numbers and practical examples. We cover what qualifies, how to track time, and what HMRC expects to see in your records.
What Qualifies as R&D in an Agency Context?
Before you apportion time, you need to know what counts. HMRC defines R&D as work that seeks to resolve scientific or technological uncertainty. For agencies, this typically means:
- Building custom software platforms or tools that solve a technical problem
- Developing new algorithms or data processing methods
- Creating innovative automation systems for campaign management or reporting
- Designing novel user interfaces or user experiences that require technical problem-solving
- Integrating multiple systems in a way that has not been done before
Routine website builds, standard content management system configurations, or typical campaign optimisations do not qualify. The work must involve a technical challenge where the outcome is not obvious at the start. If your team spent weeks figuring out how to make a custom analytics dashboard work with a legacy client system, that is R&D. If they just installed a standard plugin, it is not.
Which Staff Costs Qualify for R&D Claims?
HMRC allows you to include the following staffing costs for employees directly engaged in R&D activities [1]:
- Salaries, wages, and other emoluments (excluding benefits in kind like company cars or vouchers)
- Secondary Class 1 National Insurance contributions paid by the company
- Pension fund contributions paid by the company
Benefits in kind are excluded. So if you provide a car or fuel benefit, those costs cannot form part of your R&D claim. Only cash-based remuneration, employer NI, and pension contributions count [1].
For agency founders who are directors, your own salary and NI can be included if you are directly engaged in R&D activities. Dividends do not qualify because they are not emoluments.
The Core Problem: Mixed Time
Most agency staff do not spend 100% of their time on R&D. A developer might spend three days building a custom integration and two days fixing bugs on existing client sites. A data analyst might spend mornings building a new reporting engine and afternoons running standard reports.
HMRC recognises this. The legislation at CTA09/S1124(3) and (4) allows you to apportion staff costs where an employee is partly engaged in R&D and partly in non-qualifying work [1]. You do not need to exclude the entire salary. You just need to claim the proportion that relates to qualifying R&D activities.
How to Apportion Staff Time: Three Methods
1. Direct Time Tracking (Recommended)
The most defensible method is to track time specifically against R&D projects. If your agency uses time tracking software like Xero Projects, Harvest, or Toggl, you can create a project category for R&D work. Each team member logs their hours against that category when they are working on qualifying activities.
Example: A 12-person digital agency billing £800k per year has two developers working on a custom analytics platform. Developer A logs 120 hours on R&D in a month and 80 hours on client maintenance. Developer B logs 100 hours on R&D and 100 hours on client work. Total R&D hours for the month: 220. Total paid hours: 400. The R&D proportion is 55%.
You then apply that percentage to each developer's salary, NI, and pension costs for the month. If Developer A earns £4,000 per month, you claim £2,200 (55% of £4,000) plus the corresponding NI and pension.
2. Estimated Apportionment (Acceptable with Justification)
If you do not have granular time tracking, you can estimate the proportion of time spent on R&D. HMRC will accept estimates if they are reasonable and supported by evidence. You need to document your reasoning. For example, you might review project plans, emails, and meeting notes to estimate that a developer spent 40% of their time on R&D over a quarter.
This method is weaker than direct tracking. If HMRC enquires into your claim, they will ask for the basis of your estimate. A rough guess without documentation will not hold up.
3. Project-Based Allocation
Some agencies allocate staff costs by project. If a developer works exclusively on an R&D project for two months, you can claim 100% of their costs for that period. If they split time between R&D and non-R&D projects, you allocate based on the proportion of time spent on each project.
This works well for agencies with clear project boundaries. A web design agency that builds a custom e-commerce platform for a client might have a developer working solely on that project for six weeks. If the project qualifies as R&D, you claim the full cost for those six weeks.