To claim R&D tax relief in the UK, your costs must fall within categories defined by HMRC. Whether you’re claiming under the main RDEC scheme or the Enhanced R&D Intensive Support (ERIS) scheme for qualifying SMEs, the same six cost categories apply. This guide covers each category, what qualifies, what doesn’t, and the key rules that determine how much you can claim.
The six qualifying cost categories
HMRC permits R&D tax relief on costs in these categories only:
- Staff costs
- Externally provided workers (EPWs)
- Subcontractor costs
- Software, data licences and cloud computing
- Consumables and materials
- Clinical trial volunteer payments
1. Staff costs
Staff costs are typically the largest component of any R&D claim. You can include:
- Gross salaries and wages
- Employer’s Class 1 National Insurance contributions
- Employer pension contributions
- Bonuses directly related to R&D work
- Some reimbursed business expenses where directly related to R&D
Only the portion of time the employee spends on qualifying R&D activities counts. If a developer spends 60% of their time on R&D and the rest on maintenance or commercial work, you claim 60% of their total employment cost.
Directors are included where they’re genuinely hands-on in the R&D work — shareholder directors who don’t actively participate don’t qualify.
Training costs directly linked to R&D (for example, a new programming language required for a specific project) can also be included. General CPD or professional development cannot.
Worked example: A software engineer’s total employment cost — salary, employer NI, and pension combined — is £70,000 for the year. She spends 65% of her time on a qualifying R&D project and 35% on maintaining existing products. You can include 65% × £70,000 = £45,500 in the claim. Your basis for the 65% figure needs to be documented — project timesheets or time-logs reviewed quarterly are the standard approach HMRC expects to see on enquiry. (HMRC CIRD82100)
2. Externally provided workers (EPWs)
EPWs are workers supplied by a third-party staffing agency who are directly engaged in your R&D — typically contractors working on-site or embedded in your team. They differ from subcontractors because the agency (not the individual) holds the contract with you.
The qualifying rate depends on whether you’re connected to the provider:
- Unconnected provider: 65% of the payment qualifies
- Connected provider: the lower of the payment made or the provider’s actual qualifying costs
The 65% cap is a proxy for the labour cost element — it removes the agency’s margin and any non-R&D elements from the claim.
Example: You pay a staffing agency £10,000 per month for a machine learning engineer embedded in your R&D team. If the agency is unconnected, £6,500 (65%) qualifies. If the agency is a connected entity — say, a payroll company you partially own — the qualifying amount is the lower of £10,000 or the agency’s actual cost of employing that individual (which might be £7,200 once their margin is excluded). (HMRC CIRD85200)
3. Subcontractor costs
From 1 April 2024, the company that commissions the R&D claims the relief — not the company performing the work. This is a significant change from the pre-2024 SME rules, where subcontractors could sometimes claim on the same project.
The same connected/unconnected structure applies:
- Unconnected subcontractor: 65% of the payment qualifies
- Connected subcontractor: lower of the payment or their qualifying R&D costs
Overseas restriction: From April 2024, subcontracted R&D must generally be carried out in the UK. Overseas subcontractor costs are excluded unless the work requires a specific environment only available abroad, or is subject to regulatory requirements that mandate overseas execution. “Cheaper abroad” does not qualify.
Example: You commission an unconnected software studio to develop and test a novel algorithm where the technical uncertainty is genuine. You pay them £60,000. The qualifying amount is 65% × £60,000 = £39,000. If instead you commission a connected company — one you have a 40% stake in — for the same project at the same fee, but their actual qualifying R&D cost is £35,000 (their direct staff cost for the work), you claim £35,000, not £39,000. (HMRC CIRD84200)
For a detailed breakdown, see our guide to subcontractor costs in R&D claims.
4. Software, data licences and cloud computing
Software costs have long been claimable. From 1 April 2023, data licences and cloud computing were added to the eligible categories — a significant expansion for technology-focused businesses.
Software licences
Subscription-based software licences used directly in R&D qualify — development tools, simulation software, specialist engineering platforms. The licence must be for R&D use specifically. Mixed-use licences must be apportioned.
Capitalised software (treated as a capital asset on your balance sheet) does not qualify. Only revenue-expensed software costs are eligible.
Examples of qualifying software: finite element analysis (FEA) tools, CAD platforms, IDE licences used for R&D projects (JetBrains, VS Code where relevant), MATLAB, specialist simulation environments, and bioinformatics platforms. A tool used for both R&D and commercial product maintenance must be apportioned on a reasonable basis.
For a full breakdown of software cost eligibility, see our software R&D claims guide.
Data licences
Payments for licensed datasets used directly in R&D qualify. This is particularly relevant for AI, machine learning, and life sciences companies that purchase data as a direct input to their R&D process.
Cloud computing
Cloud costs for data storage, compute power, and cloud platforms (AWS, Azure, Google Cloud) qualify where directly attributable to R&D. General SaaS tools — email hosting, CRM platforms, general productivity software — do not qualify even if cloud-delivered. Cloud ML platforms such as AWS SageMaker or Google Vertex AI can qualify for the compute element where directly used in qualifying R&D work.
Where a service is used for both R&D and commercial purposes, apportion the cost on a reasonable basis and document your methodology. See our guide to cloud computing costs in R&D claims for more detail. (HMRC CIRD86900 covers data and cloud computing costs added from April 2023.)
5. Consumables and materials
Consumables are materials, water, fuel, and power that are consumed or transformed directly in the R&D process. For manufacturing, engineering, or biotech companies this typically includes raw materials used in prototyping and testing.
Key rules:
- The material must be consumed or transformed — not reusable equipment
- If you sell or reuse the output of the R&D process, you must deduct any net income received from the qualifying cost
- Utilities (electricity, gas, water) used directly in R&D qualify; general office utilities do not
Prototypes: Materials consumed in building a prototype qualify where the prototype is genuinely part of the R&D process — you’re testing whether a technical approach works, and the result may be scrapped, iterated on, or retained internally. Where a prototype is built primarily to demonstrate to a prospective customer or to fulfil a commercial order, even if it’s technically the first unit produced, the cost moves into production rather than R&D. The distinction is intent and context at the time the costs are incurred, not the label you put on it. (HMRC CIRD82500)
6. Clinical trial volunteer payments
Payments made to participants in qualifying clinical trials can be included. This applies primarily to pharmaceutical and medical device companies. The trials must constitute qualifying R&D — seeking to advance scientific or technological knowledge by resolving genuine uncertainty. (HMRC CIRD84400)
What doesn’t qualify
Some costs are explicitly excluded regardless of how closely they relate to R&D:
- Capital expenditure — equipment, machinery, and assets are not claimable (capital allowances may apply separately)
- Rent and lease costs for premises or equipment
- Costs recovered from a third party — if someone reimburses your R&D spend, you cannot also claim it
- Production and commercialisation costs — once you move from R&D into scaling or selling, costs stop qualifying
- Routine testing and quality control not directed at resolving technical uncertainty
- Most overseas costs for subcontractors, from April 2024, with narrow exceptions
Qualifying indirect activities (QIA)
Not all qualifying R&D work happens in the lab or the codebase. HMRC recognises a category of qualifying indirect activities (QIA) — support functions that are necessary for R&D to take place, even where the individual isn’t directly resolving the technical uncertainty.
Activities that can qualify as QIA include:
- Maintenance, security, and administration of R&D facilities — labs, test rigs, specialist equipment
- Ancillary support provided to technical staff, such as a lab technician maintaining instruments and handling samples across multiple R&D projects
- IT infrastructure and systems support directly serving R&D teams and environments (not general business IT)
- Library and information services providing access to technical and scientific resources
- Training directly required to enable R&D activities — not general staff development
What QIA does not cover:
- General administration, finance, HR, or marketing — even in a business that carries out R&D
- Clerical and accounting work relating to preparing the R&D claim itself (explicitly excluded by HMRC)
- Activities that support the business as a whole rather than the R&D function specifically
Staff costs and EPW costs for individuals engaged in QIA can be included in your claim. A lab technician who splits time between maintaining R&D equipment (QIA) and routine production duties would have their time apportioned accordingly.
QIA is one of the most commonly overlooked areas in R&D claims. The people doing enabling work often don’t appear on project plans, but their time may legitimately form part of a well-constructed claim. (HMRC CIRD81900)
Apportionment
Most companies don’t have staff or resources dedicated solely to R&D. Costs must be apportioned based on the time or usage attributable to qualifying activities. HMRC expects this on a “just and reasonable” basis — typically using timesheets, project logs, or usage records. There’s no single prescribed method, but you need to be able to explain and defend your approach on enquiry.
Frequently asked questions
Can I claim costs for work done before the R&D project was formally started?
Generally no — costs must be incurred during the qualifying R&D activity. Pre-project scoping may qualify if it was itself directed at resolving technical uncertainty, but the boundary needs care.
Do subcontractor costs still qualify if the subcontractor also claims R&D relief on the same work?
From April 2024, no. The rules prevent double-claiming — the commissioning company claims, the subcontractor does not. Before April 2024, the rules were more complex depending on which scheme applied.
Can I claim staff costs for supporting activities like project management?
Only where the individual is directly engaged in the R&D itself. A technical project manager who is hands-on in solving the technical problem can qualify. HR, finance, and general administration cannot.
What’s the difference between EPWs and subcontractors for R&D purposes?
An EPW is an individual provided by a staffing agency who works under your direction. A subcontractor is a separate business engaged to carry out a defined piece of work independently. Both have 65% caps for unconnected parties, but they’re treated under different legislative provisions and your contracts need to reflect which category applies.
Are SaaS tools like GitHub or Figma claimable?
Only if used directly in R&D, and only the proportion attributable to R&D work. A development team using GitHub for a qualifying R&D project can apportion a share of the licence cost. General design tools used for commercial work don’t qualify.
Can I include costs from a subcontractor who is also a director or shareholder?
Yes, but connected-party rules apply. You can only claim the lower of the amount paid or the subcontractor’s own qualifying R&D costs — not the full invoice value. HMRC scrutinises these arrangements closely, so contracts and cost records need to be robust.
Can I include staff who aren’t directly working on R&D projects?
Yes, in some cases. HMRC recognises qualifying indirect activities (QIA) — support roles that are necessary for R&D to take place. Lab technicians maintaining specialist equipment, IT staff supporting R&D systems, and those providing access to technical resources can qualify under QIA even if they’re not named on any project. General administration and finance staff do not qualify, and work on preparing the R&D claim itself is explicitly excluded. See the QIA section above and HMRC CIRD81900.
Make sure you’re claiming everything you’re entitled to
Misclassifying costs — or missing legitimate categories — is one of the most common issues HMRC identifies in R&D claims. Staff time is regularly underclaimed because companies don’t properly capture what their people work on. Cloud and software costs are often missed entirely. Subcontractor costs are sometimes overclaimed because the 65% cap isn’t applied.
If you’d like a second opinion on whether your current claim captures all your eligible costs, book a free call.
