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  3. What costs qualify for R&D tax credits?

What costs qualify for R&D tax credits?

Rebecca Smyth tax consultant
Tax Manager

You can claim research and development (R&D) tax credits on revenue expenditure, i.e. day-to-day operational costs. But usually capital expenditure (money spent on fixed assets such as land and buildings) is not eligible R&D expenditure within the claim.

Eligible R&D Expenditure

Revenue expenditure includes the following costs which can be included in your R&D claim:

In addition, large companies can include contributions to individuals or certain research organisations where qualifying R&D work was carried out.

Staffing costs

For SMEs and large companies this category can include:

Any benefits in kind, such as private medical cover and company cars, are specifically excluded from the staff costs category. You cannot include director dividends. And this can affect the value of your claim quite substantially if your directors spend time at work on the R&D activities.

Some employees or directors may be wholly engaged in R&D activities. However, it is more common for staff to be partly engaged in R&D. You should therefore determine the appropriate apportionment of their total staffing costs to include in your R&D claim; there are several ways of doing this. Our article, How do you identify how much R&D each staff member does?, explains.

Subcontracted R&D

The costs that you can include for subcontractors also differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme. If you are making an RDEC claim, money spent on subcontractors does not normally 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.

SME R&D tax credits and subcontracted R&D

If you are an SME 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. For ‘connected’ subcontractors, the rules are more complex and are based on the nature of the subcontractor’s expenditure.

R&D Expenditure Credits (RDEC)

Through the RDEC scheme, companies can only claim for expenditure on subcontracted R&D if the subcontractor is:

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

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

For more information on the differences between ‘connected’ and ‘unconnected’ subcontractors and their respective eligibility criteria across the R&D tax credit schemes see our article: Can I claim R&D relief on subcontractors?

Externally Provided Workers (EPWs)

Externally provided workers (EPWs) are individuals provided to your company through a staff provider. EPWs must operate through this staff provider instead of contracting directly with your company as individuals. Common examples include agency staff, contractors, and freelancers.

EPWs must work under the supervision, direction, or control of you as the claiming company, in carrying out R&D activities. An appropriate apportionment should be applied to 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% – and special rules apply for connected EPWs. For more information see our article: What are EPWS?

Consumable items

Materials that are consumed or transformed in your R&D process are defined as consumables: this category includes water, fuel, and power. Your expenditure on the materials consumed or transformed in the R&D process may be included in your claim. Common examples include materials for the construction of prototypes or for use in trials.

Once your work to resolve the technological or scientific uncertainty is finished, any additional costs for consumables (such as materials for cosmetic fine-tuning or marketing) cannot be included in your claim. You should be careful only to include the consumable costs which relate to your R&D work – this may differ from the consumable costs for your entire developed material, product, process, or service.


Your revenue expenditure on computer software involved in R&D activities may be included. As for other categories, software partly used for R&D can be included at a reasonable apportionment.

Read more about R&D tax credits for software development. Also, get insights into what the 2023 changes to R&D relief around cloud computing and data costs could mean for your business.

Clinical trial volunteers in the pharmaceutical industry

This cost category typically only features in the pharmaceutical industry. Where companies pay people who are involved in clinical trials to test the efficiency of drugs as part of an R&D project. This expenditure can be included in the R&D claim. 

Navigating the qualifying costs in an R&D tax credit claim can be difficult. At ForrestBrown our team is made up of more than chartered tax advisers; we also have chartered accountants, sector specialists, lawyers, ex-HMRC inspectors, and a former rocket scientist! We work with you to ensure all of your costs are captured and you receive the optimum value for your claim.

If you’re not sure whether your costs qualify, we’re here to help. We use a process that’s constantly evolving to remain in symmetry with HMRC’s preferred standards for receiving R&D tax credit claims.