The shape of the money side
Everything on this page assumes the activity itself qualifies; that test lives on what counts as R&D. From there, a cost has to clear four gates set by HMRC’s conditions for qualifying expenditure. It must be revenue in nature, deductible in computing the trade’s profits, incurred on activity that is R&D for tax purposes, and within one of the statutory categories. Costs also need to be paid, not merely accrued, by the time the claim is made.
The apportionment principle runs through every category: where a person or a resource is only partly engaged in R&D, only that proportion qualifies. HMRC’s own example is the staff member spending 90% of their time on R&D: 90% of their staffing cost can be claimed.
Staff costs
The core of most claims: salaries, wages and bonuses, employer’s Class 1 National Insurance, and employer pension contributions, for directors and employees directly and actively engaged in the R&D, apportioned for part-time engagement. Benefits in kind are excluded, as are redundancy payments, and clerical or maintenance work that would have happened anyway. The detail, including how to evidence apportionments, is on staff costs.
Bought-in people and bought-in R&D
Two categories cover work done by people who are not your employees, and both carry the same headline restriction for unconnected providers: 65% of the payment qualifies.
Externally provided workers are individuals supplied through a staff provider, working under your supervision, direction or control. Contracted-out R&D is work you pay another party to do where it forms part of your R&D. Connected-party rules, and an irrevocable election to be treated as connected, switch the measure to actual cost. And under the merged scheme, who may claim contracted-out R&D at all follows the “who decided to undertake it” rule. All of it is set out on subcontractors and agency workers.
Consumables, including power
Things used up by the R&D qualify: materials, chemicals, and specifically water, fuel and power, apportioned to the R&D use. The catch that surprises manufacturers: where items produced in the R&D are sold or transferred in the ordinary course of business, the consumables that ended up in those products are excluded. Prototypes you keep or scrap are one thing; a “prototype” you sell is, in HMRC’s eyes, a product.
Software, data and cloud
Revenue spend on software employed directly in the R&D qualifies, apportioned for mixed use. For accounting periods beginning on or after 1 April 2023, data licence costs and cloud computing costs, including storage, hardware facilities, operating systems and software platforms, qualify where they directly contribute to resolving the uncertainty. Data and cloud costs attributable only to qualifying indirect activities cannot be claimed.
What never qualifies
HMRC’s exclusion list is short and blunt: the production and distribution of goods and services, capital expenditure, the cost of land, the cost of patents and trademarks, and rent, rates or leasing costs. Capital spend on R&D facilities and equipment is not wasted, it belongs to the separate R&D capital allowances regime, but it does not enter this claim.
- HMRC, Check what Research and Development (R&D) costs you can claim, gov.uk
- HMRC, CIRD133000 and CIRD133100 (staffing costs), Corporate Intangibles Research and Development Manual, gov.uk
- HMRC, CIRD136000 (consumable items), Corporate Intangibles Research and Development Manual, gov.uk
- HMRC, CIRD134000 and CIRD135000 (software; data licences and cloud computing), Corporate Intangibles Research and Development Manual, gov.uk
- HMRC, CIRD112300 (conditions for qualifying expenditure) and CIRD81700 (revenue not capital), Corporate Intangibles Research and Development Manual, gov.uk
Frequently asked questions
Can we claim a share of overheads like rent?
No. Rent, rates and leasing costs are on HMRC's excluded list, however real the overhead. The utilities that are consumed in the R&D itself, water, fuel and power, are a separate, claimable category.
Do directors' salaries count?
Yes, on the same basis as any employee: emoluments, employer National Insurance and employer pension contributions, but only the proportion of time directly and actively engaged in the R&D. Dividends are not emoluments and never qualify.
We bought a machine for the project. Can we claim it?
Not through this relief: capital expenditure is excluded. A separate regime, R&D capital allowances, can give a full deduction for R&D capital spend, so the cost is not necessarily lost; it just travels a different route.
Are the percentages on contractors and agency workers negotiable?
No. For unconnected providers the 65% restrictions are fixed by statute. Connected parties, or an irrevocable joint election, switch you to an actual-cost basis instead. Which is better depends on the facts, and it is worth working through before the year end rather than after.