What costs can I include in an R&D claim?

The seven categories

There is no residual category. If a cost does not fall in that list it is not qualifying expenditure, however necessary it was to the project. That is the single most useful thing to know about R&D expenditure: the question is never “was this cost part of the R&D”, it is “which of the seven is this, and can I show it”.

The three tests every cost has to pass

Attributable to relevant R&D

The cost must be attributable to activity that qualifies as R&D—either work that directly contributes to resolving scientific or technological uncertainty, or one of the seven qualifying indirect activities. That means the boundary of your R&D project does the real work in a claim: costs cannot be more qualifying than the activity they attach to.

Revenue, not capital

R&D relief is a relief for revenue expenditure. Buildings, plant, machinery, and equipment bought for R&D are outside all seven categories, as are land, patents, and trade marks. Capital spending on R&D facilities and assets may instead attract research and development allowances, a separate relief with its own rules that can be claimed alongside a revenue claim.

Paid before you claim

An amount has to have been paid before the claim is made. Accrued but unpaid costs — an invoice sitting in creditors, a director’s bonus voted but not drawn — do not qualify until they are paid, and the general nine-month rule on unpaid employee remuneration bites as well. In practice this catches late-filed claims for periods where an intra-group recharge or a director’s bonus was never settled in cash.

Staffing costs

Your own directors and employees, to the extent they are directly and actively engaged in the R&D. The measure is earnings, employer’s secondary Class 1 National Insurance contributions and employer pension contributions, together with expenses the employee paid personally and the company reimbursed — travel and subsistence in doing the R&D being the main case, and one that is routinely left out of claims. Benefits in kind, dividends, and redundancy payments are excluded, as is anything the company paid directly rather than reimbursed. Where someone spends part of their time on qualifying activity, you claim that proportion. There is no minimum threshold and no rounding convention; it is a question of fact.

This is the largest category in most claims and has its own entry — see Which staff costs can I include in an R&D claim?.

Externally provided workers

An externally provided worker is an individual supplied to you by a staff provider under a contract, who works under your direction on your R&D. Contractors you engage directly as self-employed individuals are not externally provided workers, and neither is a recruitment fee for someone you then employ.

Where you and the staff provider are unconnected, 65% of the payments attributable to qualifying earnings is claimable. Qualifying earnings are earnings subject to UK PAYE and National Insurance, or overseas earnings that meet the overseas conditions described below. So a supplier’s invoice for a mixed team is restricted twice: first to the proportion of the workers whose earnings qualify, then to 65% of that.

Where you and the staff provider are connected, or you make a joint election to be treated as connected, you claim the lower of the payment you made and the provider’s own relevant expenditure. The election is irrevocable, applies to every payment under the contract, and has to be made in writing within two years of the end of the accounting period in which the contract was entered into.

Contractor payments

Where you contract out R&D activity, you claim on the payment to the contractor rather than on their underlying costs. For unconnected contractors, 65% of the relevant portion of the payment qualifies — the relevant portion being the part attributable to R&D undertaken in the UK, plus any overseas R&D that meets the overseas conditions. For connected contractors, or where a joint election is made, you claim the lower of the payment and the contractor’s relevant expenditure on the R&D, and payments the contractor in turn makes to its own contractors are stripped out of that figure.

Who is entitled to claim when one company does work for another is a substantial question in its own right, and the answer changed for accounting periods beginning on or after 1 April 2024. It is dealt with in the contracted-out and subsidised R&D category, not here.

Consumable items

Materials consumed or transformed in the R&D qualify, and so do water, fuel and power. Where a consumable is used partly for R&D and partly for something else, it is apportioned, and HMRC will accept a broad basis — floor area or headcount — provided it is reasonable, and you can explain it.

The trap is the exclusion for items that end up in a product you sell. Where a consumable forms part of a product that is sold in the ordinary course of business, the cost of the consumable in that product is excluded. Physical or chemical incorporation both count. Prototypes that are subsequently sold, pilot production runs, and first articles are where this bites, and it catches many engineering and manufacturing claims built on materials issued to the R&D project.

Software, data licences and cloud computing

Revenue expenditure on software used in the R&D qualifies, apportioned where the software is also used for other things. HMRC’s stated approach to apportionment here is pragmatic — an allocation by user numbers is usually accepted.

Data licences and cloud computing services became a qualifying category for expenditure incurred in accounting periods beginning on or after 1 April 2023. It covers licences to access data, and storage, processing and hardware supplied as a service. This category differs from software in a way that is easy to miss: software costs attributable to a qualifying indirect activity can qualify, whereas data and cloud costs qualify only where they are attributable to work that directly contributes to resolving the uncertainty. A data service (AWS, for example) used for the experimental runs qualifies; the same platform used for a supporting activity does not.

Neither category extends to buying hardware, and neither extends to costs of a data licence where the point of the licence is to sell or publish the data.

Payments to the subjects of clinical trials

Payments to trial participants qualify. This is a narrow category, and it is the participants themselves, not the cost of running the trial, which will usually fall under contractor payments or staffing costs.

Qualifying indirect activities

Seven activities are R&D even though they do not themselves resolve the uncertainty: information services supporting the R&D; indirect supporting activities such as maintenance, security, administration, finance and personnel work; ancillary activities such as recruiting R&D staff and maintaining equipment; training required to directly support the R&D; research by students and researchers at universities; research to devise new testing or sampling methods where that work is not itself directly contributing; and feasibility studies to inform the strategic direction of a specific R&D project.

The list is exhaustive — anything not described in it is not a qualifying indirect activity. The activity must also be identifiable as part of a particular R&D project. A finance director’s time spent on the company’s accounts is not a qualifying indirect activity because some of the company’s activity is R&D.

The overseas restriction

For accounting periods beginning on or after 1 April 2024, expenditure on externally provided workers and on contractor payments qualifies only where the R&D is undertaken in the UK — or where three conditions are met for work done abroad. The conditions the R&D needs are not present in the UK; they are present in the overseas location; and it would be wholly unreasonable to replicate them in the UK.

The conditions in question are geographical, environmental or social ones — a disease population, a mineral deposit, a deep-water site, an established research group, a facility that has to be accessed — or legal or regulatory requirements. Two things are expressly excluded from the assessment: the cost of the R&D, and the availability of workers to do it. A claim that the work went abroad because UK engineers could not be recruited, or because it was cheaper, fails, whatever the evidence.

Your own staffing costs, consumables, software, and data and cloud costs are not restricted by location in the same way — the restriction applies to externally provided workers and contractor payments.

What you cannot claim

• Capital expenditure of any kind, including plant, equipment and buildings
• Land, patents, trade marks and other intellectual property costs
• Rent, rates and leasing costs
• The production and distribution of goods and services
• Benefits in kind, dividends and redundancy payments
• Recruitment agency fees
• Costs attributable to activity that is not R&D, however closely it sits alongside the project

Position for accounting periods beginning before 1 April 2024

The seven categories were largely the same under the legacy SME and RDEC schemes, with three differences that matter when you are amending or defending an older claim.

Contributions to independent research were a qualifying category under RDEC — payments to a qualifying body, an individual or a partnership of individuals for independent research relevant to the company’s trade. That category is abolished for the merged scheme.

Subcontracting worked the other way round. Under the legacy SME scheme, a company claimed 65% of payments to unconnected subcontractors, with the connected-party lower-of rule as here. Under legacy RDEC, expenditure on R&D contracted to others was generally not claimable, with narrow exceptions for qualifying bodies, individuals, and partnerships of individuals.

There was no overseas restriction. Externally provided workers and subcontracted R&D qualified wherever the work was done.

Data licences and cloud computing services are the other date boundary: they qualify for accounting periods beginning on or after 1 April 2023 and not before, so they are available in the last year of the legacy schemes as well as under the merged scheme.