UK R&D tax relief is calculated on qualifying expenditure: the revenue costs of the R&D project that fall into the categories the legislation lists. The categories are the same for the merged scheme and ERIS, and the percentage of each cost that counts is fixed by the rules rather than by the company's own allocation. This page takes each category in turn and ends with the costs the relief leaves out.
Cost categories that qualify
| Category | What it covers | Amount that counts |
|---|---|---|
| Staffing costs | Salaries, wages, bonuses, employer National Insurance and employer pension contributions of employees directly and actively engaged in the R&D | The proportion of time spent on the R&D |
| Externally provided workers | Workers supplied by a staff provider who work under the company's supervision, direction and control | 65% of the payment to an unconnected provider; the provider's relevant costs where connected |
| Contracted out R&D | R&D the company contracts another person to carry out on its behalf, where the company made the decision to undertake it | 65% of the payment to an unconnected contractor; the contractor's relevant costs where connected |
| Consumable items | Materials, water, fuel and power consumed or transformed in the R&D | The cost of the items used, less any that end up in products sold |
| Software, data licences and cloud computing | Software used in the R&D, licences for datasets, and cloud computing services including storage and compute | The cost attributable to the R&D; data and cloud costs qualify for accounting periods beginning on or after 1 April 2023 |
| Payments to clinical trial volunteers | Payments to participants in clinical trials | The payments made |
| Contributions to independent research | Payments to qualifying bodies, individuals or partnerships for independent R&D related to the company's trade | The payment, under the merged scheme only |
Staff and time
Staffing costs are the largest category in most claims. The test is whether the employee is directly and actively engaged in the R&D, and the apportionment follows the time spent. Three groups are commonly misjudged. Supervisors and managers qualify to the extent they are themselves engaged in the project, for example directing the technical work, but not for general management. Support staff such as administrators and HR qualify only to the extent of qualifying indirect activities that directly support the project. Directors are employees for this purpose, and their remuneration qualifies on the same apportioned basis, which means dividends do not count because they are not earnings.
| Person | Qualifies? | Basis |
|---|---|---|
| Development engineer on the project | Yes | Time records |
| Technical lead who plans and reviews the work | Yes, for that time | Time records or a reasoned apportionment |
| Managing director paid partly by dividend | Earnings only, for time on the project | Salary apportioned; dividends excluded |
| Technician maintaining the test rig | Yes, as a qualifying indirect activity | Time records |
| Finance, sales and marketing | No, except indirect support of the project | Usually excluded |
Reimbursed expenses count where they are paid to the employee for costs incurred in doing the R&D, such as travel to a test site, but benefits in kind do not.
Contractors and subcontracted work
Two categories cover people who are not employees. Externally provided workers are individuals supplied by a staff provider, typically an agency, who work under the company's supervision, direction and control; 65% of the payment to an unconnected provider qualifies. Contracted out R&D is work the company engages another person to carry out, where the company decided to undertake the R&D and the work is done to its specification; 65% of the payment to an unconnected contractor qualifies. For connected parties, the amount is limited to the provider's or contractor's own relevant expenditure, and an election is needed.
From April 2024 both categories are generally limited to work carried out in the UK, with the exceptions described on the subcontracting and overseas costs page. The decision-maker rule means that a company carrying out R&D under contract for a customer usually cannot claim for that work, because the customer made the decision to undertake it, unless the contract and circumstances show otherwise.
Materials, software and overheads
Consumable items are things used up or transformed by the R&D: prototype materials, test pieces, chemicals, and the water, fuel and power used in the work. The cost of items that go into a product the company sells is excluded, so materials in a prototype that is later sold must be taken out. Utilities are apportioned to the R&D on a reasonable basis.
Software used directly in the R&D qualifies, apportioned where it is also used elsewhere. For accounting periods beginning on or after 1 April 2023, data licences and cloud computing services qualify too, which brings hosted development and test environments, storage and compute into the claim, provided the licence does not give the company a right to sell or share the data. Capital expenditure is outside the relief altogether: equipment, laboratory fit-out and purchased software treated as capital are claimed, if at all, through capital allowances, and R&D allowances give a 100% first-year allowance for capital spending on R&D.
Costs that are excluded
- Rent, rates, insurance and other overheads, except utilities consumed in the R&D.
- Capital expenditure, including equipment, premises and capitalised software.
- Dividends, benefits in kind and employer costs other than National Insurance and pension contributions.
- 35% of payments to unconnected externally provided workers and subcontractors, and 100% of such payments for work outside the UK that does not meet an exception.
- Costs of commercial, aesthetic and production activities, and of work after the uncertainty is resolved.
- Patent, trade mark and legal costs, and the cost of land.
Illustrative example
Illustrative example. Harwell Devices, a hypothetical Oxfordshire company, has the following costs on a qualifying project in its year to 31 December 2025.
| Cost | Amount | Treatment | Qualifying |
|---|---|---|---|
| Three engineers, 100% on the project (salary, employer NIC and pension) | £240,000 | Staffing costs | £240,000 |
| Technical director, 40% on the project | £120,000 | Staffing costs, apportioned | £48,000 |
| Agency test engineer, unconnected, UK based | £60,000 | Externally provided worker, 65% | £39,000 |
| UK design consultancy under contract to Harwell's specification | £80,000 | Contracted out R&D, 65% | £52,000 |
| Prototype materials consumed in testing | £30,000 | Consumables | £30,000 |
| Cloud test environments | £12,000 | Cloud computing | £12,000 |
| Test equipment purchased | £45,000 | Capital: R&D allowances instead | 0 |
| Office rent allocated to the team | £25,000 | Overhead | 0 |
| Total | £612,000 | £421,000 |
Under the merged scheme the expenditure credit would be 20% of £421,000, which is £84,200 before tax; the merged scheme page shows what the company keeps.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.