Qualifying R&D expenditure can include staff costs as well as R&D consumables, software, and more. See a list of qualifying R&D costs.
Once you’ve made sure that your company is eligible for R&D tax credits, you’ll need to identify your R&D projects and your qualifying R&D expenditure.
In this article, we’ll take you through the most common R&D qualifying costs that businesses can claim for. These may include the following:
Staff Costs
You can claim for salaries and any related costs for staff that are directly involved in your R&D projects. This needs to be proportionate to the amount of time they have spent on R&D activity.
Staff costs include salaries, class 1 National Insurance contributions, employer pension fund contributions, bonuses, staff training costs, and some reimbursed expenses.
Example: Developer spending 60% of their time on R&D
- A developer spends 60% of their time on R&D.
- Their annual salary and Class 1 National Insurance come to £50k. In addition, they received an employers pension contribution of £2k and a bonus of £5k.
- During the accounting period, there were £1.2k of staff training costs, and another £1.2k of reimbursed expenses (of which £1k was directly related to R&D projects).
Calculation:
- Salary + Class 1 National Insurance: £50,000 x 60% = £30,000
- Pension: £2,000 x 60% = £1,200
- Bonus: £5,000 x 60% = £3,000
- Staff training costs: £1,200 x 60% = £720
- Total claimable staff cost: £34,920
- Reimbursed expenses (directly related to R&D): £1,000 x 100% = £1,000
- Reimbursed expenses (non-qualifying expenses): £200 x 0% = £0
- Total claimable staff cost, plus eligible reimbursed staff expenses: £35,920
Key point: All claimable costs must be directly related to and proportionate to the time spent on qualifying R&D activities.
R&D Consumables
Items that are directly employed and consumed in the R&D projects can also qualify. They include physical materials and hardware, as well as utilities such as the power, water and fuel used directly in the R&D.
You’ll need to proportion your spend on consumables, so that only the consumable items used for R&D projects are claimed for. There are also exclusions for consumable items that are physically incorporated within items that are sold as part of your company’s ordinary business. See the HMRC manual (CIRD82500) for information on how to proportion these spends.
Software
You can claim for the cost of software used in your R&D projects. However, if you use the same software for business-as-usual activity, you should include an appropriate proportion of the software’s cost in your claim.
As examples of software that you may have used during R&D projects, you can consider the following:
- Scientific modelling & engineering simulation software
- Computer Aided Design (CAD) software
- Data processing & data analysis software
- Integrated development environments (IDEs) for compiling, testing and debugging software
- Project management software
Prototypes
You’ll often be able to include the cost of designing and constructing a prototype. However, the purpose of the prototype must be to resolve some scientific or technological uncertainty.
If you design the prototype for a commercial function (e.g. as a demonstration model at a trade show), it won’t qualify. Equally, if you later sell the prototype to a customer, the cost of the build won’t qualify for R&D tax relief. This is because HMRC will argue that you’ve resolved any technological uncertainty if you’re confident enough to sell it to a customer.
Subcontractors and Externally Provided Workers (EPWs)
Subcontractors are hired to carry out specific R&D services when the in-house expertise is not available. They are typically paid directly by your company, and not through a third-party like a staffing agency.
For the Merged R&D scheme, ERIS, and the SME scheme, you can claim 65% of the payments made to “unconnected” subcontractors. If the subcontractor is a connected party (e.g., a parent company or subsidiary), you have to claim for ‘the lesser of 100% of the R&D payment made to the subcontractor and the relevant expenditure in the connected party’s accounts.” For instance, if the connected subcontractor charged you £5,000 for the R&D work conducted on your behalf, but it only cost them £3,500 to carry out the activity, you would only be able to claim 100% of the lower R&D payment, which is £3,500.
Under the RDEC scheme, claims are only allowed for costs that involve individuals, partnerships, or qualifying bodies like universities, NHS trusts, or charities.
In contrast, EPWs (Externally Provided Workers) are temporary workers supplied by a third party. You pay the third party and not the individuals doing the work directly. EPWs cannot be on your payroll as they would otherwise fall under your staff costs instead. EPWs work under your direction and supervision, acting as an extension of your workforce. Common examples of third-party EPWs include:
- Staffing agencies
- A Personal Service Company (PSC)
- Connected companies
For EPWs, you can usually claim up to 65% of the payments made to the external staff provider, whether under the new Merged R&D scheme, ERIS, SME scheme, or RDEC.
Research Contributions
Research contributions are payments made to third-party organisations to conduct research on your behalf.
Large companies may be able to claim these as an eligible R&D cost, but not SMEs. The research must be relevant to your field or scientific pursuit. An “individual or partnership of individuals”, or “a qualifying body” must conduct the research. A qualifying body would be a charity or higher education institute, or a named scientific research body. In most cases, the organisation needs to be based in the UK but HMRC provides a list of some qualifying overseas bodies.
Clinical Trial Volunteer Costs
Clinical trials are of course essential for pharmaceutical R&D. Businesses can claim for the costs associated with both attracting and paying for the volunteers. If this is relevant to your business, consult HMRC manual CIRD84400.
Cloud computing and data costs
For accounting periods beginning on or after the 1st April 2023, you’ll be able to claim relief for some cloud computing and data costs that are associated with R&D activity.
For instance, this category includes cloud computing costs that are associated with AI and machine learning solutions, as well as the license payments for data sets that are used. See our guide to cloud computing and data costs for R&D.
Pure Mathematics
For accounting periods beginning on or after the 1st April 2023, the definition of R&D tax credits has also been expanded to include pure mathematics as a qualifying cost.
The addition of pure mathematics to the list of qualifying costs will help with the growing volume of R&D fueled by mathematical advances. This will benefit developing industries in which the UK has a competitive advantage, such as Artificial Intelligence, quantum computing and robotics. It will also support strong business sectors like manufacturing and desig
To learn more, see our guide on pure mathematics costs for R&D.
