R&D Expenditure: Which Costs Qualify?

3 February 2020

There are 5 categories of R&D expenditure that are eligible for R&D Tax Credits. These include cost of staff and subcontractors, consumables and software.

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Innovative businesses can claim R&D Tax Credits on the operational costs they incur while performing R&D activity. Depending on which scheme they are eligible for, companies can claim back up to 33% or their R&D Expenditure.

However, not all R&D expenditure is eligible within a claim. For example, some types capital expenditure are not eligible, like patent expenses and capital costs.

There are 5 (+1) categories of R&D expenditure that are eligible for R&D Tax Credits. These are:

  • Staffing Costs;
  • Subcontracted R&D;
  • Externally Provided Workers (EPWs);
  • Software;
  • Consumables
  • Clinical Trials Subjects.

The first five are usually applicable to any company that carries out R&D activities, while the last one mainly applies to the pharmaceutical sectors.

Let’s take a look at each category of R&D Expenditure in detail.

Staffing Costs

Companies claiming R&D Tax Credits for both the SME scheme (R&D Credits) and the large company scheme (RDEC) can include the remuneration of their employees involved in R&D.

This includes:

  • Gross salaries;
  • Overtime pay and cash bonuses;
  • Employer National Insurance contributions;
  • Employer Pension Contributions;
  • Some reimbursed expenses incurred by employees can also be claimed.

Where staff only spend a portion of their time working on R&D projects, their remuneration needs to be apportioned.

Staffing costs do not include benefit in kind (e.g. private medical cover or company cars). Director dividends are also excluded, which might be worth taking into consideration when directors are heavily involved in day-to-day R&D operations.

Subcontracted R&D

When a company hires contractors to carry out part of their R&D, the expenses involved can be eligible within a claim under the SME R&D Tax Credit scheme, but not under the RDEC scheme.

Under the SME scheme, 65% of the R&D expenditure for subcontractors that are ‘unconnected’ to the claiming company is eligible. ‘Unconnected’ companies are businesses with no significant economic interest in the company making the claim.

If the subcontractor is, instead, ‘connected’ there are more complex rules. In this case the expenditure of the subcontractor has to be examined more closely in the claim.

Under the RDEC scheme, R&D expenditure on subcontractors is only eligible when the subcontractor is:

  • an individual;
  • a partnership where all the partners are individuals;
  • a ‘qualifying body’, including charities and some academic and scientific organisations.

Externally Provided Workers (EPWs)

Externally Provided Workers (EPWs) are provided to a company by an external staff provider. For EPWs, broadly the same rules apply as for subcontracted R&D.

When EPWs work under the direct supervision, direction or control of the claiming company, 65% of the cost linked to R&D activities is an eligible R&D expenditure. As above, if their work is not wholly focused on R&D activity, it must be apportioned correctly.

This applies to unconnected EPWs, and special rules apply for ‘connected’ ones.

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    By ‘consumable items’ HMRC means any materials that are either consumed or transformed in your R&D processes. This category includes inputs such as electricity, gas and water as well as materials and chemicals that are used in the R&D process.

    It must be noted that any materials or consumables that are involved in the final product design, but are not instrumental to the R&D process intended as the overcoming of a scientific or technological uncertainty, do not count as eligible R&D expenditure.


    Software that is bought, developed or licensed wholly to support R&D activities counts as eligible expenditure. When software is only partly used for R&D its cost may still be included at an adequate apportionment.

    Clinical Trial Subjects

    This cost category will mostly be relevant to businesses in the pharmaceutical industries. Individuals that are paid to take part in clinical trials testing newly developed drugs count as eligible expenditure for R&D tax credits purposes.

    Once you are clear on which of your expenses qualifies for R&D Tax Credits, you can use our Claim Calculator to work out how much your claim could be worth.

    The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.