Which costs can you claim for as part of an R&D tax credits claim?

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You can claim Research and Development (R&D) tax credits on revenue expenditure, i.e. day-to-day operational costs, which sit within the profit and loss area in your accounts. But usually capital expenditure (money spent on fixed assets such as land and buildings) are not considered eligible for inclusion in the claim.

Eligible R&D expenditure

Revenue expenditure is broken down into the following groups which can be included in your R&D claim:

  • employee costs
  • subcontracted R&D
  • Externally Provided Workers (EPWs)
  • consumables
  • software
  • payments to the subjects of clinical trials.

Employee costs

Both SMEs and large companies in this category can include:

  • gross salaries (including overtime pay and cash bonuses)
  • employer NI contributions (including from April 2023 the Health and Social Care Levy)
  • employer pension contributions
  • certain reimbursed business expenses.

Staffing costs of directors or employees directly and actively engaged in relevant R&D can be qualifying expenditure. This includes both those directly and actively engaged in activities which directly contribute to achieving the advance in science or technology and those directly and actively engaged in qualifying indirect to the extent that such activities are relevant R&D. For example, the relevant portion of a maintenance engineer’s time spent repairing equipment being used specifically and solely for an R&D project. You cannot claim for clerical or maintenance work that would have been done anyway, like managing payroll or the costs attributable to a clerk in the maintenance department completing paperwork.

Any benefits in kind, such as private medical cover and company cars, are specifically excluded from the staff costs category, alongside director dividends.

Some employees may be wholly engaged in R&D activities. However, it is more likely for staff to be partly engaged in qualifying R&D activities. You should therefore determine the appropriate apportionment of their total staffing costs to include in your R&D claim.

Subcontracted R&D

The costs that you can include for subcontractors differs between both SME and RDEC schemes. If you are making an RDEC claim, money spent on subcontractors generally does not qualify for tax relief – but there are some exceptions which are explained below. If you are making an SME claim, you can include 65% of payments made to unconnected parties as explained below.

RDEC Scheme

The following categories are eligible for inclusion as subcontractors through the RDEC scheme:

  • a qualifying body (including charities, universities, and scientific research organisations);
  • an individual; or
  • a partnership, where all partners are individuals.

This expenditure does not need to be restricted to 65% in the same way as for SME claims.

SME Scheme

If you are a making a claim via the SME scheme, you can include expenditure on subcontractors that were involved in R&D projects in your R&D tax credit claim. For ‘unconnected’ subcontractors, payments that are linked to R&D activities are restricted to 65% for the purposes of the claim. The actual work carried out by the subcontractor need not be R&D when looked at in isolation. For example, you may need to subcontract machining of a specialist material as part of your R&D activities to another company who has the specialised equipment needed for the machining. The machining may be well established and routine and on its own would not be R&D. But the subcontracted work will count as R&D from the perspective of your company, as it forms part of the larger R&D project. For R&D subcontracted to a connected party, the 65% rule is removed and you can claim R&D tax credits on the lower of:

  • the payment that it makes to the subcontractor; and
  • the relevant expenditure of the subcontractor.

Externally Provided Workers (EPWs)

EPWs are individuals provided to your company through a staff provider. EPWs must operate through this staff provider rather than contracting directly with your company as individuals. For example, agency staff and contractors.

EPWs must work under the supervision, direction or control of the claiming company in carrying out R&D activities. With the same rules applied with regards to the application of an appropriate apportionment of the expenditure if an EPW carries out both R&D and non-R&D activities.

For ‘unconnected’ EPWs, payments that can be included in your R&D tax credit claim are restricted to 65% – there are additional areas to consider for connected EPWs, for example they cannot be directors of the claiming company.

Consumable items

Consumed items can be defined as materials that are consumed, transformed or used up directly as part of the R&D process, this includes water, fuel and power. For example, materials that are purchased for use in the construction of a prototype which is used to trial and further develop the R&D activities or a laboratory chemical used up in the development of an R&D process.

Materials that are consumed after the work to resolve the technological or scientific uncertainty has been completed or materials that are sold cannot be included as a qualifying cost.


Revenue expenditure incurred on software employed directly in R&D or as part of qualifying indirect activities are allowable categories of qualifying expenditure.

Where software is only partly employed in direct R&D, an appropriate apportionment of the expenditure should be made. A pragmatic approach should be adopted – for example, an apportionment based on staff numbers may prove most suitable where a particular software product is used by R&D and non-R&D staff.

Changes to schemes from April 2023 include the addition of both cloud computing and data costs.

Clinical trial volunteers in the pharmaceutical industry

When pharmaceutical companies develop a drug, they must gain the approval of regulatory authorities in order to market the drug. The process of approval involves the appraisal of the safety and efficacy of the drug in a series of clinical trials. The trials involve the testing of the drug in both healthy patients and patients with the target disease or condition. Pharmaceutical companies and contract research organisations will often make payments to people volunteering to take part in clinical trials. Trials are conducted under ethical guidelines and the nature of the trials and what is expected of the volunteers will be fully explained to them and documented.

Costs that cannot be claimed

You cannot claim for:

  • the production and distribution of goods and services
  • capital expenditure
  • the cost of land
  • the cost of patents and trade marks
  • rent or rates.

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