Two things have to qualify: the work, and the money spent on it. Work qualifies where it is part of a project seeking an advance in science or technology through the resolution of scientific or technological uncertainty — uncertainty a competent professional working in the field could not readily resolve. Spending qualifies where it falls into one of the categories the legislation allows: staff costs, externally provided workers, subcontracted R&D, consumables, software with data licences and cloud computing, and payments to clinical trial volunteers. Both tests apply to the same expenditure. Qualifying costs spent on work that is not R&D give you nothing, and neither does genuine R&D paid for in a category the rules exclude.
What makes the activity qualify
The definition sits in guidelines issued by the Department for Science, Innovation and Technology, which HMRC applies. R&D takes place for tax purposes when a project seeks to achieve an advance in science or technology, and the activities that qualify are those directly contributing to that advance through the resolution of scientific or technological uncertainty.
Uncertainty has a specific meaning here. It exists where knowledge of whether something is scientifically possible or technologically feasible, or of how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. Where such a professional could readily resolve the question, there is no scientific or technological uncertainty, and no qualifying R&D. Commercial risk, budget pressure and a tight deadline are not uncertainties of this kind. What a scientific or technological uncertainty is takes the harder of the two tests further.
New to your company is not enough
This is the distinction borderline claims turn on. An advance in science or technology means an advance in overall knowledge or capability in a field, not in a company’s own state of knowledge or capability alone. Overall knowledge or capability means what is publicly available, or readily deducible from what is publicly available, by a competent professional in the field.
So the routine analysis, copying or adaptation of an existing process, material, device, product or service does not advance overall knowledge or capability, even where it is completely new to the company or the company’s trade. A first-in-house build of something the field already knows how to do is not R&D, however hard the team found it. The reverse holds too: work can qualify where a competitor has already solved the same problem but keeps the solution as a trade secret. What doesn’t count as R&D works through the exclusions one by one, and qualifying R&D holds the advance and uncertainty tests together.
Which costs qualify
Six categories, fixed by legislation:
- Staff costs — salaries, wages, bonuses, employer pension contributions and employer National Insurance for the people doing the qualifying work, apportioned to the time they spent on it
- Externally provided workers — agency and staff-provider workers under your direction, at 65% of the payment where the provider is unconnected; where every party is connected a different measure applies, set out in which costs qualify
- Subcontracted R&D — work you contract out, at 65% of the payment to an unconnected contractor
- Consumables — materials, chemicals and ingredients used up or transformed in the R&D, plus the fuel, power and water it consumes
- Software, data licences and cloud computing — licence fees for software used for R&D; data licences and cloud computing qualify for accounting periods beginning on or after 1 April 2023, which covers every current-scheme claim
- Clinical trial volunteers — payments to the subjects of clinical trials
Two location conditions bite for accounting periods beginning on or after 1 April 2024. Subcontracted R&D qualifies only where the work is undertaken in the UK, and externally provided workers only to the extent their earnings are subject to UK PAYE and Class 1 National Insurance. The exception is narrower than it sounds. It applies only where conditions the R&D needs — geographical, environmental or social conditions, or legal and regulatory requirements — are not present in the UK, are present where the work is done, and would be wholly unreasonable for the company to replicate here. All three have to hold. The cost of doing the work abroad, and the availability of workers there, are expressly excluded as reasons. Which costs qualify has the full treatment, category by category.
Which costs fall outside a claim
The rule runs the other way round: only the listed categories go into an R&D claim, and nothing else does. HMRC gives examples of what falls outside —
- the production and distribution of goods and services
- capital expenditure, including equipment and buildings
- the cost of land
- the cost of patents and trademarks
- rent, rates and leasing costs
Capital expenditure 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. The cost of the land is excluded there, but a building is not — including an R&D facility you build from scratch, where the construction cost qualifies in full.
Cost categories and activity boundaries are separate tests, and spend has to clear both. A developer’s salary is a qualifying cost, but not for the months after the technological uncertainty was resolved and the work turned to production. Consumables drop out too where you sell or transfer ownership of the items used up in the R&D, which catches trial batches that reach a customer.
Settling the question before you claim
Most of the argument in an R&D enquiry is about the first test, not the second. HMRC checked around one in six claims in 2023-24, its latest published figure, and the question it asks is usually whether the project sought an advance in the field at all. That is a technical judgement, made by the competent professional who did the work and tested against what the field already knew. Settle it before a claim is prepared, not during a check.
If you want a straight view on which of your projects and costs qualify, send us the work and we will tell you which side of the line we think it falls on.
Sources
- Guidelines on the meaning of R&D for tax purposes — paragraph 3 on a project seeking an advance in science or technology; paragraph 4 on activities directly contributing through the resolution of uncertainty; paragraph 6 on an advance being in overall knowledge or capability in a field rather than the company’s own; paragraphs 13 and 14 on what a scientific or technological uncertainty is and what a competent professional can readily resolve; paragraph 20 on publicly available or readily deducible knowledge; paragraphs 21 and 22 on trade secrets and on routine analysis, copying or adaptation being new to the company but not to the field.
- Check what R&D costs you can claim — the qualifying categories of staff costs, externally provided workers, contracted-out R&D, consumables, software, data licences and cloud computing and clinical trial volunteer payments; the 65% restriction on payments to unconnected providers and contractors; the apportionment of staff costs to time spent on R&D; the exclusion of consumable items whose ownership you sell or transfer; and the list of costs that cannot be claimed.
- CIRD150500: overseas restrictions, overview — the general rule excluding EPW spend outside UK PAYE and contractor payments for R&D undertaken overseas, and the three conditions of the qualifying overseas expenditure exception.
- CIRD151100: excluded conditions — cost of the R&D and availability of workers expressly excluded as conditions.
- CTA 2009 s.1138A — the statutory exception, in force for accounting periods beginning on or after 1 April 2024.
- HMRC’s approach to R&D tax reliefs 2023 to 2024 — 9,700 compliance checks against around 61,000 claims received, the source of the one-in-six check rate.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.