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.
What HMRC Looks For in Your Records
HMRC expects to see contemporaneous evidence. That means records created at the time the work was done, not reconstructed months later. Key documents include:
- Timesheets or time tracking reports showing hours against R&D projects
- Project plans and technical specifications describing the R&D work
- Meeting notes or emails that discuss technical challenges and solutions
- Payroll records showing salaries, NI, and pension contributions for the relevant staff
If you are using the merged RDEC scheme (which applies to accounting periods beginning on or after 1 April 2024), the qualifying expenditure rules are identical to the old SME scheme for staff costs [2]. The calculation of the credit amount differs, but the apportionment rules remain the same.
Common Mistakes Agency Founders Make
Claiming 100% of a director's salary when they only spend 30% of their time on R&D. HMRC will spot this. Be honest about the proportion.
Including benefits in kind. Car allowances, health insurance, and other non-cash benefits are excluded from staff costs for R&D purposes [1].
Ignoring the intensity condition for ERIS. If your agency is loss-making and R&D intensive, you might qualify for Enhanced R&D Intensive Support (ERIS). The intensity condition requires that relevant R&D expenditure is at least 30% of total expenditure (including connected companies) [2]. If you are close to that threshold, accurate apportionment becomes critical.
Not documenting the technical uncertainty. HMRC wants to see what technical problem you were trying to solve. If your timesheets just say "development work," that is not enough. You need to link the time to a specific technical challenge.
Real Example: A Creative Agency Claim
Consider a 15-person creative agency based in Bristol Harbourside. They build custom websites and digital platforms for clients. Over a 12-month period, they develop a new content personalisation engine that uses machine learning to tailor website content based on user behaviour.
Three developers work on this project. Their time tracking shows:
- Developer 1: 800 hours on R&D, 400 hours on other work (67% R&D)
- Developer 2: 600 hours on R&D, 600 hours on other work (50% R&D)
- Developer 3: 400 hours on R&D, 800 hours on other work (33% R&D)
Total R&D hours: 1,800. Total paid hours: 3,600. Overall R&D proportion: 50%.
The agency calculates total staff costs for these three developers: salaries £120,000, employer NI £13,800, pension contributions £4,800. Total: £138,600. The R&D proportion is 50%, so the qualifying staff cost is £69,300.
Under the merged RDEC scheme, the agency claims a 20% credit on that £69,300, giving a credit of £13,860 [2]. If the agency is loss-making and meets the intensity condition, they might claim ERIS instead, allowing an extra 86% deduction on qualifying costs [2].
What About Contractors and Freelancers?
Staff costs only cover employees and directors. If you use contractors or freelancers, their costs are treated differently. You can include payments to externally provided workers (EPWs) if they are engaged through a staffing company or agency. Directly engaged freelancers may qualify under the consumables or software categories, but not as staff costs.
If you have contractors working on R&D, speak to your accountant about the correct treatment. The rules differ depending on whether the contractor is on your payroll, engaged through an umbrella company, or invoicing you directly.
How Agency Founder Finance Can Help
As ICAEW qualified accountants, we work exclusively with agency founders. We have helped dozens of agencies prepare robust R&D claims that stand up to HMRC scrutiny. We do not just calculate the numbers. We help you set up the time tracking systems, document the technical uncertainty, and apportion costs correctly from the start.
If you are considering an R&D claim for your agency, start by reviewing your time tracking. If you do not have a system in place, set one up before you begin the R&D work. Retrospective claims are possible, but they are harder to defend.
For more guidance on agency-specific tax matters, explore our tax and compliance resources or learn about our services for agency founders.