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What Costs Can Be Claimed Through R&D Tax Credits

Research and development is a cornerstone of innovation and growth for businesses; the UK is a global leader in innovation, fifth in the Global Innovation Index’s rank for high-income countries in 2024.

However, R&D can also be a costly process, which is why the UK government provides R&D tax credits as an incentive for businesses to invest in this area.

What are R&D tax credits?

Companies can claim R&D tax credits as part of their Corporation Tax return, getting up to 27% back from HMRC as a reduction of your tax bill or, in some cases, as a cash credit!

The R&D tax credit scheme is available to businesses of all sizes, across all sectors. The qualifying criteria are intentionally wide-ranging, allowing any company that is developing new scientific or technological advances

To qualify for R&D tax credits, a business must demonstrate that they are undertaking qualifying R&D activities. These activities must seek to achieve an advance in science or technology and involve the resolution of scientific or technological uncertainties.

What costs can R&D tax credits cover?

R&D tax credits in the UK can cover a wide range of costs, although each category has its own caveats.

There are some limitations to claiming R&D costs; one of the most important things to remember is apportioning your expenditure per project. Just because a cost was involved in your R&D doesn’t mean you can claim the whole bill. You should be apportioning based on how much of your expenditure was actually used to carry out the R&D.

It is important to keep detailed records of all R&D costs, as well as to ensure that they meet the requirements set out in the R&D tax credit legislation. HMRC has increased the number of compliance checks regarding R&D tax credit claims and, if you’re unlucky enough to get that letter through the door, you may need to provide evidence of the costs you’ve claimed.

Staff costs are a huge portion of most companies’ outgoings, even more so for R&D-intensive companies. Luckily, you will be able to claim back some of these costs using R&D tax credits.

It covers salaries, employers' NICs, company pension contributions and even reimbursed expenses.

It is not uncommon for an R&D team to consist of many individuals from different parts of the business. From those carrying out the R&D development, like engineers, scientists and software developers, to your essential support team, like finance personnel, project co-ordinators and quality assurance staff, there are plenty of opportunities to claim for your staff costs.

Learn more on the details of claiming staff costs in an R&D tax credit claim.

Your outsourced R&D is also an eligible category, though the rules are a little tricky since new rules were announced by HMRC.

The work carried out by the subcontractor does not have to be R&D in isolation, but it should be an essential part of the company's broader R&D project. For example, a company can claim for third-party testing even if the work itself is routine for the third-party, as it’s essential to testing out the results of the company’s R&D.

For those claiming under the SME scheme (i.e., eligible SMEs claiming for accounting periods beginning before 1 April 2024), your contractors can be included in your claim.

SMEs can typically claim 65% of the eligible costs of subcontracted R&D, as long as the subcontractor is not connected to the company. If the subcontractor is connected, such as a subsidiary or branch, then the claim will be based on either the eligible expenditure of the contractor or the R&D payment made to them, whichever is lower.

Under the RDEC scheme (i.e., mostly for large companies claiming for accounting periods beginning before 1 April 2024), subcontractor fees are ineligible. However, independent contributions from individuals, universities, charities or research bodies can be claimed.

Under the Merged scheme (i.e., for all companies claiming for accounting periods beginning on or after 1 April 2024), both SMEs and large companies are able to claim for contractors. However, only work carried out in the UK can be included in claims going forward.

Previously, a UK-based company could have an R&D team operating in a different country, and the UK government would have footed a significant portion of the bill. Now, many companies will need to revisit their contracting agreements or commit to losing a large slice of their R&D tax credit claim.

There will be exceptions for specific conditions, such as geography, environment, population, or regulatory requirements, necessitate research in particular territories, such as deep ocean research or clinical trials. However, these exceptions will not apply to cost or workforce availability.

Learn more about the new overseas restrictions for R&D tax claims.

With large companies now in the running for claiming subcontractors, HMRC announced clarifications around who has the right to claim for R&D work carried out. Learn more about the rules around claiming for subcontracting R&D.

Externally Provided Workers (EPWs) follow the same rules as subcontractors, except they are an eligible category for large companies claiming through the RDEC scheme.

This category includes cases where a staff provider, such as an employment agency, is contracted to supply external workers for the R&D work. These workers should be under the control of the claimant, even if not directly employed by them.

The 65% cap remains for companies that are not connected (removed for connected companies). Similarly, for companies claiming under the Merged Scheme, overseas EPWs cannot be included.

Items that are directly employed, consumed or transformed in the R&D process are considered ‘consumable items’. Most often, consumable items refers to utilities (fuel, water, power) and materials directly used in prototypes or trial runs.

These costs tend to be the smaller proportion of a claim, however keeping good records of them can quickly build into a substantial portion of the costs being claimed. HMRC understands that with many of these examples, like power and water, it can be hard to split bills between R&D and non-R&D costs, so they will accept reasonable estimates based on the requirements of the R&D.

Fixed assets cannot be included, but might open the door to R&D capital allowances.

The main thing to remember with consumable items is that they cannot be claimed if the materials are later sold. For example, a company is developing a new form of packaging that uses reduced energy in the production process. Their final batch is successful, and the company finds a buyer for the batch before it makes its R&D tax claim, meaning the cost of the materials in the final batch is ineligible for R&D tax relief.

Claims can include the cost of software directly employed in the R&D activity. Software costs can also be included if they are involved in any qualifying indirect activities.

This can include the cost of purchasing, renting, or developing software that is used to carry out R&D. Examples of software that can be claimed include scientific modeling software, simulation software, and software used for data analysis.

For accounting periods starting on or after 1 April 2023, data licence and cloud computing services costs can be included in an R&D tax claim.

Clinical trials can be an essential part of the R&D process in the pharmaceutical and biotechnology sectors.

Contributions to clinical trial volunteers are eligible for R&D tax relief. It is important to note, however, that not all costs associated with clinical trials are eligible for R&D tax credits. For example, costs associated with marketing, sales, and distribution of the product resulting from the trial are not eligible.

Only costs associated with trials conducted to gain regulatory approval or to improve the performance or effectiveness of a product will be eligible for R&D tax credits.

Questions? Get in touch!

Claiming R&D tax credits in the UK can be a valuable way for companies to offset the costs of their research and development activities. The costs that can be claimed include everything from employee wages to utilities.

If you would like to discuss any aspect of R&D tax credits, feel free to contact our friendly expert team on 020 7360 4437 or send us a message.