Module 3: Eligible costs

After this module you will be able to list the cost categories that R&D incentives allow, explain how staff time is attributed to qualifying work, describe the usual treatment of contractors, materials, software, overheads and capital, and know which costs to leave out.

What this module covers

The two questions to ask of every cost: category and attribution.
Staff costs and how time is apportioned.
Contractors: percentages, caps and location rules.
Materials, software, overheads, capital and grants.

Two questions for every cost

A claim is a list of costs, each attached to a qualifying project. Two questions decide whether a cost belongs on the list. First, is it in a category the scheme allows? Staff, contractors, materials and consumables appear in every country's list; software, cloud, overheads and capital are treated differently from country to country. Second, how much of the cost was spent on the qualifying work? A salary is eligible only for the time spent on the project; a materials invoice only for the items consumed in it. Finance owns the first question; the technical team and their records own the second, which is why module 5 matters to the numbers as much as to the narrative. The rate from module 1 is applied to the total of attributed costs, not to the department budget.

Staff costs

Staff costs are the largest category in most claims and the one reviewers test first.

Who counts. People directly engaged in the R&D: the engineers, developers and scientists doing the work, and in most countries those directly supervising or supporting it. General management of the company, administration and work on excluded activities do not count.

What counts. Salary, and in several countries the employer's payroll taxes and pension or superannuation contributions on it. Bonuses, benefits and dividends are treated differently from country to country; check the country page.

How much counts. The proportion of the person's time spent on qualifying work. Every tax authority expects that proportion to rest on time records or another reasonable, consistent method supported by evidence.

Contractors and outside help

Contracted work can be eligible, but it is where the seven countries differ most. Three kinds of rule recur.

A percentage. Several countries allow only part of the invoice. The United States allows 65% of contract research costs, the United Kingdom 65 percent of payments to an unconnected subcontractor, and Canada 80 percent of arm's length contract payments.
A cap. Ireland limits contracted work by reference to the company's own qualifying spending.
A location rule. Most schemes prefer work done in the country. Contracted work done overseas is excluded, limited to a share of the claim, or allowed only where a stated condition is met.

Two further points recur: the contractor generally cannot claim for the same work, and the arrangement should be agreed in writing before the work starts.

Materials, software, overheads and capital

Cost category	Usual treatment	Record that supports it
Staff	Apportioned by the time spent directly on the R&D	Time records, or a documented and consistent allocation method
Contractors	A percentage, a cap or a location condition; the contractor cannot also claim	Contract agreed before the work, invoices, a description of what was done
Materials and consumables	Cost of items used up or transformed in the R&D; items that end up in products sold are excluded or adjusted	Purchase records coded to the project
Software, cloud and data	Allowed in some countries, apportioned to the R&D; base deduction only in others	Invoices and a usage apportionment
Overheads such as rent and power	Ranges from excluded, to apportioned on a reasonable basis, to replaced by a fixed proxy percentage of salaries	The apportionment basis, written down
Equipment and buildings	Usually outside the main claim, with a separate allowance, depreciation or decline in value route for the R&D use	Asset register showing R&D use
Grant-funded spending	Reduces the claim or triggers an adjustment in most countries	Grant letters and the allocation of grant to costs

Materials are eligible when they are used up or transformed in the work. Where a prototype or trial batch is sold, several countries exclude the cost of the items incorporated or add an adjustment, because the company recovered part of the cost. Interest, patent costs, marketing and distribution are excluded everywhere. Most countries will not pay an incentive on money the company did not itself spend. The United Kingdom's current scheme contains no restriction for subsidised or grant-funded expenditure, the exception that shows why the country page must be read before the numbers are built.

Illustrative example

Illustrative example. Harbour Robotics Ltd, a hypothetical company, carries the gripper project from module 2 into its cost schedule. Two engineers are paid 60,000 each and their time records show half of each year on the gripper, so staff costs attributed to the project are 60,000. A testing laboratory invoiced 20,000 for load trials under a contract signed before the work began; the eligible amount depends on the country, which may allow the full 20,000, a percentage of it, or none if the laboratory is overseas. Components consumed in prototypes cost 10,000, of which 2,000 went into a robot later sold, so finance flags that 2,000 for the country's adjustment rule. Cloud simulation time cost 5,000 and is allowed in some countries and not others. Rent of 30,000 is excluded in one country, apportioned in several and replaced by a proxy in one. Before the country rules are applied, the schedule shows 60,000 of staff, 20,000 of contractor, 10,000 of materials and 5,000 of cloud. The benefit is that country's rate applied to whatever survives those rules, so the company reads its country page before quoting a figure to the board.

Across the seven countries

Country	Main cost rules, in the country's words
United States	Qualified research expenses are wages, supplies and 65% of contract research costs, linked to the qualifying work. Contract research expenses qualify only to the extent the research is conducted within the United States.
United Kingdom	Staffing costs of directors and employees directly and actively engaged in R&D, apportioned where only partly so engaged; 65 percent of payments to an unconnected subcontractor for contracted out R&D. Relief for contracted out R&D and externally provided workers is generally limited to work carried out in the UK.
Ireland	Expenditure incurred wholly and exclusively in carrying on R&D activities. Work by an unconnected person on behalf of the company qualifies up to the greater of 15 percent of the company's own qualifying expenditure and €100,000. General overheads such as rent, rates, insurance and administration are excluded. Expenditure met by grant assistance is not qualifying expenditure.
Canada	Salary or wages of employees directly engaged in SR&ED qualify for the portion of time so engaged. Only 80 percent of arm's length contract payments are included in qualified expenditures. Overheads are claimed under the traditional method or replaced by the prescribed proxy amount of 55 percent of the salary base. Qualified expenditures are reduced by government assistance.
Australia	An R&D entity can notionally deduct expenditure incurred on registered R&D activities, to the extent the expenditure is incurred on those activities. Salary expenditure must be apportioned on a reasonable basis. Overhead expenditure is notionally deductible to the extent it is incurred on R&D activities. Interest and expenditure on buildings cannot be notionally deducted.
New Zealand	Salary or wages and other employee remuneration, including employer superannuation contributions, to the extent the employee performs R&D activities. Expenditure on a contractor performing R&D on behalf of the claimant is eligible for the claimant. Overhead expenditure is eligible to the extent it relates to R&D activities and is apportioned on a reasonable basis. R&D performed outside New Zealand is limited to 10 percent of the total eligible expenditure for the year.
Singapore	The enhanced deduction applies to staff costs and consumables for qualifying R&D carried out in Singapore. Other R&D expenditure, including overheads, utilities and software, qualifies for the base 100 percent deduction but not for the additional deductions. R&D expenditure met by a government grant or subsidy is not deductible to the extent of the grant.

Where to go next

Compare R&D incentives by country: rates and limits.
Scheme mechanics: how the rate and the base turn eligible costs into value.
What reviewers look for in records made at the time: the evidence behind apportionment.
Running a claim: guides on building and filing the numbers.
R&D Tax Fundamentals: the program overview. Module 4 puts these costs into the claim lifecycle.