Which costs qualify for R&D tax relief

Only costs in the statutory categories qualify: staff costs, externally provided workers, contractor payments, consumable items, software, data licences and cloud computing, and payments to clinical trial volunteers. Each category has its own rules on how much can be claimed, and for accounting periods beginning on or after 1 April 2024 every cost must have been paid before the claim is made.

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What are the categories of qualifying expenditure?

The categories are set out in Part 13 of the Corporation Tax Act 2009 (CTA 2009) and are the same for the merged R&D expenditure credit scheme and enhanced R&D intensive support. HMRC’s table at CIRD131000 maps them to the legislation:

Category	CTA 2009 sections	HMRC guidance
Staffing costs	1123 to 1124	CIRD133000
Software, data licences, cloud computing and consumables	1125 to 1126B	CIRD134000 to CIRD136000
Externally provided workers	1127 to 1132A	CIRD137000
Contractor payments	1133 to 1136	CIRD138000
Payments to clinical trial subjects	1140	CIRD139000

Contributions to independent research, which large companies could claim under the old R&D expenditure credit, cannot be claimed for accounting periods beginning on or after 1 April 2024. The costs must also relate to activity that is R&D for tax purposes, as explained in what counts as R&D for tax relief, and fall between the start and end of the project.

Which staff costs can be claimed?

Staff costs cover directors and employees of the claimant company who are directly and actively engaged in relevant R&D. Under section 1123 the measure is:

salaries, wages, bonuses and other emoluments, but not benefits in kind such as company cars, accommodation or vouchers;
secondary Class 1 National Insurance contributions paid by the company;
pension fund contributions paid by the company;
reimbursed expenses that the employee paid in order to carry out the duties of the job, such as travel to an R&D meeting.

Redundancy payments are not emoluments and do not qualify, following Nichols v Gibson, and HMRC normally expects payments in lieu of notice and garden leave to be excluded. Where someone spends only part of their time on R&D, only that proportion qualifies: HMRC’s example is that 90% of a salary can be claimed for someone spending 90% of their time on R&D. Staff carrying out qualifying indirect activities within the project, such as filing experimental results or recruiting a scientist for the project, can qualify, but corporate departments supporting the business generally cannot. Staff costs recharged by another group company are not the claimant’s own staff costs, although the recharge may qualify as an externally provided worker cost.

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How are agency and externally provided workers treated?

An externally provided worker is an individual who is not a director or employee of the claimant, personally provides services under its supervision, direction or control, and is supplied through a staff provider (CIRD137100). Payments to self employed consultants and contracts for more than the supply of staff fall outside this category.

Unconnected staff provider: 65% of the staff provision payment qualifies.
Connected staff provider: the lower of the payment and the staff provider’s own relevant costs of the workers, provided it accounts for them within 12 months after the end of the claimant’s period.

The company, staff provider and staff controller can jointly elect to be treated as connected. The election is irrevocable and must be made in writing within two years from the end of the accounting period in which the contract was entered into. From 1 April 2024 only qualifying earnings count, which broadly means earnings subject to UK PAYE and National Insurance; see restrictions on overseas R&D costs.

How are subcontractor costs treated?

A contractor payment is a payment for R&D the company has contracted out. Only the company that decided on and planned the R&D can claim, which is covered in who claims R&D relief on contracted work. The amounts follow the same pattern as staff providers:

Unconnected contractor: 65% of the relevant portion of the payment.
Connected contractor, or one with a joint election under section 1135: the lower of the payment and the contractor’s relevant expenditure on staff, software, data, cloud, consumables, externally provided workers and clinical trial payments.

Payments the contractor makes to its own subcontractors are not part of its relevant expenditure, so they cannot flow into the customer’s connected party claim.

What about consumables, software, data and cloud computing?

Consumable items are things used up or transformed in the R&D, including materials, chemicals, water, fuel and power. Where electricity is not separately metered, HMRC accepts a reasonable apportionment, for example by floor area or staff numbers. Section 1126A removes the cost of consumables that end up in products sold or transferred in the ordinary course of business, but waste and scrap sales are not treated as in the ordinary course.

Software licence fees qualify to the extent the software is used in the R&D, including qualifying indirect activities. A pragmatic apportionment, such as by numbers of R&D and non R&D users, is acceptable.

For accounting periods beginning on or after 1 April 2023, data licences and cloud computing costs also qualify. A data licence is a licence to access and use a collection of digital data, and cloud computing covers data storage, hardware, operating systems and software platforms. Unlike software, these costs qualify only when used in activity that directly resolves the uncertainty, not in qualifying indirect activities.

Payments to the subjects of clinical trials, such as volunteers testing a new drug or medical technique, form a separate category.

What costs can never be claimed?

Capital expenditure, which may instead attract research and development allowances.
The cost of buying property, and rent, rates or leasing costs.
The cost of patents and trademarks.
Production and distribution of goods and services.
Anything unpaid when the claim is made. Section 1139A applies a payment condition to every category, and staff costs unpaid more than nine months after the balance sheet date are deducted in the period they are paid.

How does the calculation work in practice?

HMRC’s example at CIRD138000 shows the contractor rules. Company B invoices unconnected Company A for £100,000, of which £50,000 is R&D contracted out by A. Half of that, £25,000, is done overseas and the exception in section 1138A does not apply. A’s qualifying expenditure is £25,000 multiplied by 65%, which is £16,250.

Illustration only. A company has one engineer paid £60,000 who spends 75% of her time on an R&D project, with employer National Insurance and pension of £10,000 on that salary. It also pays an unconnected agency £20,000 for a UK tester working wholly on the project, and £4,000 for cloud computing used directly in experiments.

Cost	Calculation	Qualifying
Engineer	75% of £70,000	£52,500
Agency tester	65% of £20,000	£13,000
Cloud computing	100% of £4,000	£4,000
Total		£69,500

What mistakes come up most often?

Claiming 100% of payments to unconnected contractors or agencies instead of 65%.
Including benefits in kind, redundancy pay or general overheads such as rent.
Claiming cloud costs for administrative or other indirect use.
Including invoices not yet paid at the date of the claim.
Treating group recharges as the claimant’s own staff costs.
Claiming consumables built into prototypes that were later sold.

The figure for qualifying expenditure is the starting point for the credit itself; the way the credit is reflected in the accounts is covered in accounting for R&D tax credits.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.