Six categories of expenditure can be included in an R&D tax relief claim: staff costs, externally provided workers, subcontracted R&D, consumables, software with data and cloud computing, and payments to clinical trial volunteers. Capital expenditure, rent and patent costs do not qualify for R&D tax relief, though capital spending on R&D can instead attract R&D allowances. The categories are fixed by legislation, so the real work of a claim is matching your actual spending to them, and evidencing the apportionments, in a way that withstands an HMRC check.
The qualifying cost categories at a glance
| Category | What it covers | Points to watch |
|---|---|---|
| Staff costs | Gross salaries, employer NIC, employer pension contributions, reimbursed expenses | Apportion by time spent on qualifying R&D |
| Externally provided workers | Agency and staff-provider workers under your direction | 65% of payments to unconnected providers; workers must be within UK PAYE and Class 1 NIC |
| Subcontracted R&D | R&D activity you contract out to a third party | 65% for unconnected subcontractors; UK work only by default; who claims depends on the contract |
| Consumables | Materials used up or transformed in the R&D, plus light, heat, water and power | Apportion utilities where they serve the whole site |
| Software, data and cloud | Software licences, data licences and cloud computing used for R&D | Apportion mixed-use licences and platforms |
| Clinical trial volunteers | Payments to volunteers taking part in clinical trials | Mainly life sciences and pharmaceutical claims |
Staff costs
Staff costs are usually the largest category in a claim. For employees and directors who work on qualifying R&D you can include gross salaries, employer National Insurance contributions, employer pension contributions and reimbursed business expenses.
Almost nobody spends 100% of their time on R&D, so apportionment is where this category is won or lost. Each person’s costs enter the claim at the proportion of their time spent on qualifying activity, and that proportion needs a recorded, explainable basis: timesheets where they exist, a structured and documented estimate where they do not. A technical director who spent a quarter of the year resolving technological uncertainty and the rest running the business belongs in the claim at a quarter. The apportionment basis is one of the first things HMRC tests in an enquiry. Staff costs for qualifying indirect activities, the supporting work the Guidelines treat as R&D, can be included on the same apportioned basis where the time is specific to the project.
Externally provided workers (EPWs)
EPWs are workers supplied by a third party, typically an agency, who work under your direction and supervision but are paid by their provider. Where you, the provider and the business that contracts directly with the worker are not all connected, 65% of what you pay qualifies, limited to the part relating to qualifying earnings. Where all three are connected, the 65% does not apply. You claim the lower of what you paid and the staffing cost that contracting business incurred in supplying them, again counting qualifying earnings only. That strips out the provider’s margin, so it beats 65% where the provider charges close to cost and falls short of it where the mark-up is heavy.
One condition catches connected groups out. The payment has to appear in the provider’s accounts, and the cost in the accounts of whoever contracts the worker, in a period ending within twelve months of your own year end. Companies with the same year end clear this without thinking about it. Where the dates do not line up, or the cost was never booked, the whole payment drops out — not down to 65%, out.
For accounting periods beginning on or after 1 April 2024 there is a further condition: EPW costs qualify only where the workers are subject to UK PAYE and Class 1 NIC. Overseas contract staff working outside UK payroll are excluded, subject to the narrow exception covered below.
Subcontracted R&D
Subcontractor costs raise two separate questions: how much qualifies, and who is entitled to claim at all. On the first, payments to unconnected subcontractors qualify at 65%. On the second, the current rules turn on what was agreed when the contract was made: the customer claims where it intended or contemplated at that point that R&D of that sort would be done; otherwise the contractor can claim in its own right. Getting this wrong means claiming relief that belongs to someone else. The full analysis, with contract scenarios, is in contracted-out R&D: who claims?
Consumables
Materials that are used, consumed or transformed in the R&D process qualify: raw materials, lab reagents, prototype components, test batches — the trial runs and scrapped materials that make up much of a manufacturing R&D claim. So does the light, heat, water and power consumed by the R&D itself. Utilities usually serve the whole site, so claim a sensible, recorded proportion rather than the full bill. One exclusion matters in practice: materials that end up in something you sell in the ordinary course of business — a prototype sold to a customer, a trial batch that reaches the market — have been outside the consumables claim since 1 April 2015. Output that is scrapped, kept for testing or sold only as waste is unaffected.
Software, data licences and cloud computing
Software used for R&D qualifies, and data licences and cloud computing costs are claimable for accounting periods starting on or after 1 April 2023, which covers every current-scheme claim. Compute for model training, hosted development environments and licensed datasets all belong here. Where a licence or platform serves both R&D and routine operations, include the R&D proportion and record how you arrived at it.
Clinical trial volunteer payments
Payments to volunteers taking part in clinical trials are a qualifying category in their own right. They arise mainly in pharmaceutical, biotech and medtech claims, where trials are a standard part of development. Trials also raise their own boundary and location questions, particularly when run overseas, which we cover under the overseas restriction below.
Which costs fall outside a claim?
Some costs never enter an R&D tax relief claim, however central they feel to the work:
- capital expenditure, including equipment and buildings
- rent and rates on your premises
- patent and trademark costs, including the professional fees around them
Capital expenditure is worth a second look, because it is excluded from R&D tax relief rather than from tax relief altogether. Capital spending on R&D can attract R&D allowances instead, a 100% capital allowance under the capital allowances rules. The cost of the land itself is excluded, but a building is not: buy a site with a laboratory on it and the price is apportioned between the two; build a new R&D facility and the construction cost qualifies in full. Rent and rates have no such route: they are ordinary trading deductions.
One thing looks capital but is not. Revenue R&D spending you capitalise as an intangible asset in your accounts still counts as revenue for these purposes, so development costs sitting on the balance sheet are not shut out of a claim. The claim sits in the period the spending was incurred, though, not in the later years the asset is written down over.
The activity boundary matters as much as the category. Spending in a qualifying category still falls out of the claim if the activity itself was not qualifying R&D, for instance production work after the technological uncertainty was resolved. If you are unsure where your project’s boundaries sit, start with what counts as qualifying R&D.
The overseas restriction
For accounting periods beginning on or after 1 April 2024, subcontracted R&D qualifies only where the work is undertaken in the UK, and EPW costs only where the workers are subject to UK PAYE and Class 1 NIC.
There is one exception: qualifying overseas expenditure. It applies where conditions necessary for the R&D (geographical, environmental, social or regulatory, such as a clinical trial population or a regulator’s requirements) are not present in the UK and would be wholly unreasonable to replicate here. Cost savings and workforce availability are expressly excluded as justifications, so cheaper development abroad does not get through. The detail, and what it means for planning, is in overseas R&D costs under the merged scheme.
What are qualifying costs worth?
Once the qualifying costs are established, the benefit depends on your scheme and tax position.
Under the merged R&D scheme, which applies to companies of all sizes, the credit is 20% of qualifying expenditure. £100,000 of qualifying spend gives a £20,000 gross credit, worth £15,000 net at the 25% corporation tax rate and £16,200 where the 19% rate applies or the company is loss-making.
Loss-making SMEs whose relevant R&D expenditure is at least 30% of total relevant expenditure can instead claim Enhanced R&D Intensive Support (ERIS), worth up to 26.97p per £1: on the same £100,000 of qualifying spend, £100,000 x 186% x 14.5% = £26,970 as a payable credit, given sufficient losses. If you are not sure which route fits, which R&D scheme applies to your company walks through the decision. For a worked example on real numbers, the Midtec Products case study breaks down a £40,000 claim across staff, agency and material costs.
Getting cost capture right
A defensible claim traces every figure back to payroll records, ledgers and invoices, with the apportionment basis written down at the time. HMRC checked around one in six R&D claims in 2023-24, its latest published figure, and cost questions (apportionment bases, subcontractor status, connected parties) feature in most of the checks we see. Our guide to HMRC R&D enquiries explains what happens when a claim is selected and how prepared claims hold up. For the rules scheme by scheme, all of our R&D tax relief guides are indexed in one place.
If you want a view on which of your costs qualify, and in what proportions, talk it through with a chartered adviser. Bring your cost structure and we will tell you plainly what belongs in a claim and what does not.
Sources
- Check what R&D costs you can claim — the qualifying cost categories and the 65% contractor rule.
- CIRD137000: externally provided workers — the current-regime page: 65% for unconnected providers, the lower-of basis for connected ones, and the qualifying-earnings restriction.
- CIRD84000: externally provided workers — the equivalent guidance for periods beginning before 1 April 2024.
- CIRD138000: contractor payments — 65% of payments to unconnected subcontractors.
- CIRD150500: overseas restrictions, overview — the general rule and the qualifying overseas expenditure exception.
- CIRD151100: excluded conditions — cost and workforce availability excluded as conditions.
- CTA 2009 s.1138A — the statutory exception, in force for accounting periods beginning on or after 1 April 2024.
- R&D tax relief reform changes — data licences and cloud computing qualifying from 1 April 2023.