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 never qualify. 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.
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 the provider is unconnected to you, 65% of what you pay them can qualify.
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 the specific R&D at that point; 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. 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.
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 never qualify?
Some costs never enter an R&D 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
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 cannot reasonably be replicated 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.
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 checks roughly one in six R&D claims, 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.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
Sources
- Check what R&D costs you can claim — the qualifying cost categories and the 65% contractor rule.
- CIRD84000: externally provided workers — 65% of payments to unconnected EPW providers.
- CIRD138000: contractor payments — 65% of payments to unconnected subcontractors.
- CIRD151000: overseas restrictions — the UK-location rule, with cost and workforce availability excluded.
- R&D tax relief reform changes — data licences and cloud computing qualifying from 1 April 2023.