Eligible R&D Costs

Key facts

Staff costs are typically the largest component: gross salaries, employer NI, and pension contributions for employees working on R&D.
Subcontractor costs are included at 65% of the amount paid to unconnected parties under the merged RDEC.
Externally provided workers (agency staff, secondees) are included at 65% of the payment made.
Consumable materials used up or transformed by R&D qualify — raw materials, components, and prototypes.
Software licences and utilities (power, water, fuel) directly used in R&D are eligible from April 2023.

Overview of Eligible Costs

To claim R&D tax credits under the merged RDEC (or ERIS), you need to identify and quantify your qualifying expenditure. Only certain categories of cost are eligible, and each has specific rules about what can be included.^[1]

The main categories of qualifying R&D expenditure are:

Staff costs
Externally provided workers (agency/seconded staff)
Subcontractor costs
Consumable materials
Software and data licences
Utilities (power, water, fuel)

Staff Costs

Staff costs are usually the largest element of an R&D claim. They include:^[3]

Gross salary or wages paid to employees directly engaged in R&D
Employer’s National Insurance contributions on those earnings
Employer’s pension contributions for those employees

You can claim for the proportion of time each employee spends on qualifying R&D. For example, if a developer spends 60% of their time on R&D projects, you can claim 60% of their staff costs.

Tip: Keep timesheets or project records showing the proportion of time each employee spends on R&D. HMRC may ask for this evidence during a compliance check. Even simple records — such as a monthly estimate by project — are better than nothing.

Included in Staff Costs	Not Included
Gross salary / wages	Benefits in kind (company car, medical insurance)
Employer NI contributions	Dividends paid to director-shareholders
Employer pension contributions	Bonuses not linked to R&D work
Reimbursed expenses directly related to R&D	Travel costs (unless to an R&D site)

Externally Provided Workers

If you use agency staff, contractors supplied through a staffing company, or individuals seconded from another organisation to carry out R&D, their costs can qualify as externally provided workers (EPWs).^[4]

Under the merged RDEC, EPW costs are eligible at 65% of the payment made to the staff provider. This restriction accounts for the provider’s margin and overheads.

Example: You pay an agency £50,000 for a contract developer who works on your R&D project. You can include £32,500 (65% × £50,000) in your qualifying expenditure.

Subcontractor Costs

When you outsource R&D work to another company (a subcontractor), the rules depend on whether the subcontractor is connected or unconnected:^[2]

Subcontractor Type	Allowable Amount
Unconnected party	65% of the payment made
Connected party	Lower of: 65% of payment or the connected party’s relevant R&D staffing costs

Under the merged RDEC, it is the company commissioning the R&D that claims the credit, not the subcontractor performing the work. This is a change from the old large-company RDEC rules for some scenarios.

Consumable Materials

Materials and components that are consumed or transformed by the R&D process qualify. This includes:^[2]

Raw materials used in prototypes
Components tested to destruction
Chemical reagents and biological materials
Materials used in pilot production runs (if the purpose is to resolve uncertainty)

Materials that are incorporated into a product that is then sold or used commercially generally do not qualify, because they have not been consumed by the R&D process itself.

Software and Data Licences

From 1 April 2023, the cost of software licences and data licences used directly in R&D activities can be claimed. This includes:^[1]

Specialist R&D software (simulation tools, CAD/CAM, statistical analysis)
Cloud computing costs directly attributable to R&D processing
Data sets purchased specifically for R&D analysis

General-purpose software (Office 365, email, standard accounting packages) does not qualify unless it is used exclusively for R&D purposes.

Utilities

Power, water, and fuel costs directly attributable to R&D can be included in your claim. This is particularly relevant for companies that run laboratories, workshops, or test facilities.^[1]

You should apportion utility costs based on the proportion of energy used by R&D activities versus other business operations.

Costs That Do Not Qualify

The following costs are not eligible for R&D tax credits:

Capital expenditure (equipment, machinery, buildings) — these may qualify for capital allowances instead
Rent and rates for premises
Patent and IP registration costs
Marketing and market research
Production costs for commercially sold products (after uncertainty is resolved)
Land costs

Frequently Asked Questions

Can I claim for directors' time on R&D?

Yes, provided the director is paid through PAYE and the time is genuinely spent on qualifying R&D activities. You should keep records of the proportion of time each director spends on R&D. Dividends do not count as staff costs — only salaries and employer NI/pension contributions qualify.

Why are subcontractor costs restricted to 65%?

Under the merged RDEC, only 65% of subcontractor costs from unconnected parties are eligible. This restriction reflects the fact that the subcontractor may be making their own profit margin, and HMRC wants to limit claims to the approximate cost of the R&D work itself. For connected-party subcontractors, you can claim the lower of 65% of the payment or the connected party’s relevant staffing costs.

Are cloud computing costs eligible?

Data licences and cloud computing costs used directly in qualifying R&D can be eligible from April 2023 onwards. However, general business cloud costs (email hosting, standard SaaS subscriptions) do not qualify unless they are used directly and exclusively in the R&D process itself.

Can I claim for failed prototypes?

Yes. The cost of materials and components used in prototypes that are built, tested, and ultimately scrapped as part of resolving scientific or technological uncertainty are qualifying expenditure. R&D relief applies to the process of resolving uncertainty, not just to successful outcomes.

Sources

Corporation Tax: Research and Development (R&D) relief — GOV.UK
CIRD82000 – R&D tax relief: categories of qualifying expenditure — HMRC
CIRD84200 – R&D tax relief: staffing costs — HMRC
CIRD84400 – R&D tax relief: externally provided workers — HMRC