Klara AdamsR&D Analyst

Klara has an MSc in Sustainable Energy Futures from Imperial College alongside a background in Mechanical Engineering. She believes R&D plays an integral role in facilitating the UK energy transition.

An R&D claim can only include revenue expenditure (the R&D qualifying costs associated with the day-to-day running of your business). Capital expenditure – which includes costs attributable to fixed assets – will not usually be eligible for R&D tax-credits.

There are, however, specific tax incentives for money spent on capital assets for R&D purposes – it is best to check with your advisor which type of relief is most appropriate for your business.

What are the qualifying R&D costs & expenditure you can include in a claim?

The main cost categories which are classed as revenue expenditure and are therefore potentially eligible for inclusion in an R&D claim are:

  • Staff costs;
  • Subcontractor costs for R&D;
  • Externally Provided Workers (EPWs);
  • Consumables (including light, heat, water, electricity);
  • Software; and
  • Payments to the subjects of clinical trials.

We go into each of these in more detail in this article.

Can VAT be included in an R&D tax-credit claim?

Depending on the type of business VAT can be included in an R&D claim – however, in most instances, VAT cannot be included in a claim. This is because the cost of VAT paid is recoverable against the sales that a business makes.

However, where a company is classified as exempt (as opposed to zero-rated), VAT is not recoverable and hence is a cost to the business that can be included in the claim.

It’s always best to consult with a tax professional for more information about the specific case.

Staff costs explained

The following staff costs can be included in an R&D claim:

  • Gross salaries and wages
  • Pay for overtime and monetary bonuses
  • National Insurance contributions (Class 1)
  • Pension fund contributions
  • 65% of payments made to external agencies or personnel-sourcing firms that provide staff specifically for the project
  • who undertake work specifically for the project can also be included.

Corporate benefits (such as private medical cover) as well as directors’ dividends are specifically excluded from a claim.

The portion of people’s time spent on eligible R&D projects is usually more partial than total. It is, therefore, necessary to identify the correct apportionment of each person’s staffing costs: apportioning individual staff members’ time on R&D can be done in several ways. A specialist adviser will be able to guide you on the best approach for your business.

Subcontracted R&D

If your business is claiming under the SME scheme, then all subcontractor costs are restricted to 65% (the subcontracted party should be ‘unconnected’). Large companies who are claiming through the RDEC incentives and have also spent money on subcontractors wouldn’t usually qualify for subcontractor relief, but there are some exceptions. Subcontractor expenditure under RDEC does not need to be capped at 65% (as it does under the SME scheme) but the subcontracted R&D expenditure can only be included if it pertains to:

  • An individual;
  • A partnership, where all partners are individuals; or
  • A qualifying body, in the form of: a charity, a higher education institute, a scientific research body, or a health service organisation
  • Retaining control of the overarching R&D project, even if certain elements are undertaken autonomously by subcontractors

Whether you are a large company or an SME for tax purposes, it is important to retain good records and contractual clarity around the nature of the subcontractor’s relationship and their level of autonomy for problem-solving in your R&D projects. It is important to demonstrate ownership of R&D. For the purposes of an R&D project, ‘ownership’ means:

  • Owning, retaining, or benefitting from any Intellectual Property (IP) which transpires as a result of the R&D
  • Inheriting the economic risk of the R&D i.e. the cost of overruns/failure
  • Retaining control of the overarching R&D project, even if certain elements are undertaken autonomously by subcontractors

Externally Provided Workers (EPWs)

Externally provided workers (EPWs) are distinct from subcontractors in so far as EPWs are individuals provided to your company through another company, a “staff provider” are workers who have been sourced from an external staff provider. These individuals should be on the payroll (PAYE) of another company but contracted out to the claimant company. HMRC provide the following conditions that should be met for an individual to be considered an EPW:

  1. they are an individual (not a company)
  2. they are not a director or employee of the company
  3. they personally provide, or are under an obligation personally to provide, services to the company
  4. they are subject to (or to the right of) supervision, direction or control by the company as to the manner in which those services are provided
  5. their services are supplied to the company by or through the staff provider or staff controller (whether or not he is a director or employee of the staff provider or staff controller or any other person)
  6. they provide, or are under an obligation to provide, those services personally to the company under the terms of a contract between the person and the staff provider. (applies only to 31 March 2012. See below)
  7. the provision of those services does not constitute the carrying on of activities contracted out by the company

Consumable items

The legislation defines ‘consumable items’ as those materials which are used up or transformed in your R&D work. Commonest within this category are fuel and power; light, heat, and water. Any expenditure which is incurred on the materials consumed or transformed in the process of resolving an R&D’s project’s core ‘scientific or technological uncertainty’ may be included in your claim. This can include materials for prototypes in manufacturing, or certain materials in construction projects.

Clear boundaries around all the costs which are being attributed to your R&D projects are important. Consumable costs should only be included in so far as they relate to your eligible R&D activities and their codifiable resolution – this may differ from the wider commercial project or its end-point, so understanding the legislation here is important.


The government has proposed a number of significant imminent changes to eligible software and cloud-computing costs (coming into effect in 2023). Any expenditure on computer software which is involved in R&D activities may be included in an R&D tax credit claim. Software costs can be apportioned, as with other cost categories, at an accurate and representative rate.

Forthcoming legislative changes which acknowledge the growing prevalence of software costs and cloud computing are likely to broaden the cost categories in relation to software technology. HMRC have promised greater clarity before April 2023, but it may be important to discriminate between software costs which are directly involved in R&D and those which are more ‘indirect’.

Clinical trial volunteers

If you are carrying out R&D in the pharmaceutical sector, you may be carrying out drugs testing as part of your development work. Payments made to people who have participated in drug trials may be included in your R&D claim.