R&D Qualifying Expenditure

Staff costs come first and are usually the largest line: salaries, wages, bonuses, employer National Insurance, pension contributions and some training, apportioned to the time spent on the R&D.

Then consumable items, meaning fuel, materials, chemicals, power and water, to the extent they were consumed in the R&D. Software licence fees, apportioned where the software is only partly used for R&D. Data licences and cloud computing, including data storage, hardware, operating systems and platforms. Payments to contractors carrying out R&D work. Payments to clinical trial volunteers.

Last, qualifying indirect activities: the scientific information services, maintenance, security, administration, clerical, finance and personnel work that supports the R&D without being the R&D. This category is routinely left out of claims that could legitimately include it.

Where the provider is unconnected, payments to subcontractors carrying out R&D and payments for externally provided workers are restricted to 65% of the amount paid. A £100,000 spend on contract engineering enters the claim at £65,000.

Where the parties are connected, the restriction is different: the claim is the lower of 100% of the payment and 100% of the provider's own qualifying costs. A group cannot inflate a claim by pricing intercompany work above cost, and it needs the provider's actual cost figures rather than the invoice.

Heavy external labour has a second consequence. It usually means a small payroll, which brings the PAYE and NIC cap into play on the payable credit. The two rules compound, and both are worth modelling before the year end rather than after it.

Five things are outside the relief outright: production and distribution of goods and services, capital expenditure, the cost of land, patents and trademarks, and rent, rates and leasing costs.

The production exclusion is the one that causes the most argument, because the boundary between developing a process and running it is a matter of fact rather than of category. Trial runs and the work of establishing whether a process can hold a tolerance sit inside the relief; the saleable output of the same run does not.

Capital expenditure being excluded from this relief does not mean it gets no relief at all, only that it is a separate question from an R&D tax credit claim. Confusing the two leads companies to put equipment purchases into a claim, which is a visible error.

Almost every real claim turns on apportionment: what share of a person's time, a power bill or a software licence went to the R&D. HMRC does not prescribe a method, which means the method has to be defensible on its own terms.

Time recorded against development activity is the strongest position. A reasoned estimate built from project records, design reviews, sprint history or test logs is acceptable. A round percentage applied across a team with nothing behind it is the weakest, and it is the first thing a compliance check asks about.

The practical advice is to separate at the time rather than reconstruct afterwards. A trial run logged as a trial, with its scrap recorded, is a claim line. The same run reconstructed from stock movements a year later is an argument. HMRC lists the categories in its guidance on what R&D costs you can claim, and companies combining a claim with grant funding should check the interaction, which runs through Innovate UK.