R&D qualifying costs and expenditure

What counts as qualifying expenditure

HMRC is clear that you can only claim costs that fall within their listed categories and that relate to qualifying R&D activity, including qualifying indirect activities.  A cost also needs to be paid to be included and it must relate to the period and the R&D project boundaries you are claiming for. This includes work in areas like software and pure mathematics, where the activity meets HMRC’s definition of R&D and is linked to resolving uncertainty.

For accounting periods after 1 April 2024, most companies claim under the merged R&D tax relief scheme, with Enhanced R&D Intensive Support (ERIS) available for some R&D-intensive loss-making SMEs. The cost categories and many of the rules are aligned across the merged scheme and ERIS, so this guidance applies to both.

Qualifying indirect activities

HMRC allows some indirect activity that supports a specific R&D project, but it is not a free pass for overheads. Their examples include certain admin and clerical activities, maintaining R&D equipment, scientific and technical information services, and feasibility studies that inform the direction of a specific R&D activity. The key is that the activity forms part of the R&D project rather than being general business support.  

Getting started: your R&D project boundaries

Before you total costs, define where the R&D starts and ends. HMRC expects R&D to be linked to resolving scientific or technological uncertainty. In practice, this means you should separate experimental and investigative work from routine build, deployment, production, and support. Getting the boundary right is what makes the cost schedule defensible, especially for roles that span both R&D and business as usual.

Cost categories

Staff

Staff costs are usually the biggest number in a claim and HMRC expects you to claim the proportion of employment costs that relates to qualifying R&D activities and qualifying indirect activities. This includes salary or wages, certain bonuses, employer Class 1 NIC, employer pension contributions, and training costs, but only to the extent they are attributable to qualifying activity. The practical test is whether you can explain and support your apportionment in a consistent way.  

A common mistake is treating senior management time as qualifying by default. If someone is involved in R&D only at a high level, you should be cautious and make sure the narrative clearly explains what technical contribution they made, and why it was needed to resolve uncertainty.  

How to calculate staff costs HMRC can follow

Start from payroll totals, then apply an R&D percentage per person based on how they actually worked. HMRC does not mandate timesheets, but whatever method you use should be repeatable and supported by records such as tickets, sprint plans, test plans, lab notes, design reviews, and project plans. Your end totals should reconcile back to payroll and the ledger.  

Externally provided workers (EPWs)

EPWs are workers supplied by a staff provider or agency. HMRC’s qualifying costs rules apply different treatments depending on whether the provider is connected to your company. For unconnected providers, HMRC generally allows 65% of the relevant staff provision payments and there are different rules where the provider is connected. EPWs often get challenged when businesses treat contractor invoices as EPWs without the supply chain and PAYE position being clear.  ‍

Subcontractor and contractor payments (contracted-out R&D)

From 1 April 2024, the “contracting out” rules are driven by a simple principle: only the company that made the decision that R&D needed to be carried out and planned the R&D can claim. You can claim contractor costs where you contract out your own R&D and can evidence decision making and planning.  

The percentage you can claim depends on whether the contractor is connected to your company. If connected, you can claim the lower of 100% of what you paid or 100% of the contractor’s relevant costs. If not connected, HMRC generally allows 65% of the contractor payment.  

If you are doing R&D work to fulfil a customer contract, the position can be nuanced. HMRC focuses on whether the customer initiated the R&D or knew it needed to be done to fulfil the contract. If so, the customer may be the decision maker rather than you.  

Overseas restrictions

Overseas restrictions can apply to certain R&D expenditure, including contractor payments and EPWs. HMRC’s guidance sets out a limited exception where the conditions necessary for the R&D are not present in the UK, are present overseas, and it would be wholly unreasonable to replicate them in the UK. HMRC guidance also makes clear that cost or worker availability is not enough on its own to meet the exception.  

‍Consumables and materials

These are items that are used up or transformed in carrying out qualifying R&D. This can include prototype materials, test materials, fuel, power, water, and similar consumables that are genuinely consumed by the R&D work. The usual risk area is where materials are used for wider commercial delivery. Keep the allocation logic clear and avoid sweeping percentages that are not tied to test plans or build records.

Software

Software licence costs can qualify where the software is used directly in R&D activity. If software is used for both R&D and non-R&D purposes, HMRC expects a reasonable apportionment that reflects actual usage. The cleanest approaches usually use licence counts, user groups, or project access controls to support a sensible split.  

Data licence and cloud computing costs

Data and cloud costs are a relatively new qualifying category in UK R&D tax relief, introduced to reflect how modern R&D is actually carried out, especially in software, engineering and data-led sectors. HMRC allows certain cloud computing services and data licence costs where they are used directly in qualifying R&D activity and you can apportion costs where services are shared between R&D and non-R&D use.

HMRC allows many data and cloud costs that are spent on R&D, but there is a critical restriction: you cannot claim data and cloud computing costs that relate to qualifying indirect activities. In practice, that means you need to link these costs to the direct work resolving uncertainty, such as development and testing environments used to run experiments or process test data, rather than general overhead use.

To keep this category robust, it helps to document what the service was used for, who used it and how you calculated any R&D percentage, such as by project environments, tagged usage, user groups, or a reasonable usage basis that you can repeat each year.

Clinical trial volunteers

If you run clinical trials, payments to volunteers can qualify. This category is specific and HMRC treats it separately from general staffing or contractor costs, so it is worth keeping a clear schedule of volunteer payments and how the trial relates to your qualifying R&D project.

Costs you cannot include in your R&D tax relief claim

You can only claim listed categories and that many common business costs are excluded. Examples include capital expenditure (such as buying equipment or machinery), land and buildings, patents and trademarks, rent, business rates or leasing costs. Other typical non-qualifying costs include travel and subsistence, entertaining, sales and marketing spend, customer support, recruitment fees, professional services like legal and general accountancy work, insurance, interest and financing costs, and general office costs that are not used up in R&D activities.

If a cost looks like general overhead, treat it as excluded unless it clearly falls within a qualifying category and you can link it directly to the R&D project.

How to build a cost schedule

A good schedule starts from source records and works forward, not the other way round. Staff costs should reconcile to payroll, EPWs and contractors should tie to contracts and invoices, and software, cloud and consumables should tie back to ledgers with a clear allocation method. If you can show how each number was built and why it belongs to a specific project and period, you reduce the risk of follow-up questions and make any HMRC review much smoother.