Understanding Eligible Costs in UK RDEC Claims

Understanding Eligible Costs in UK RDEC Claims

One of the key elements in preparing a successful Research and Development Expenditure Credit (RDEC) claim is understanding what costs qualify as R&D. HMRC provides specific guidance on allowable cost categories, and it’s important for businesses to identify and allocate expenditure correctly against the HMRC categories. 

The amount being claimed per cost type listed below, is required to complete the mandatory online R&D Additional Information Form. 

Note that for accounting years starting from 1st April 2024, there is no longer any restriction on claiming R&D on costs that have been subsidised by grant funding or a service contract.

Here is a list of the R&D cost types that can be claimed and need to be identified separately.

1. Employee/staffing costs

Payroll salaries including the gross salary, employer NICs, employer pension contributions and certain reimbursed expenses for employees directly involved in R&D, are qualifying costs. There are two distinct categories that need to be split out in order to complete the mandatory online R&D Additional Information Form. 

a) Staff directly involved in carrying out work on the R&D project (e.g. researchers, scientists, engineers and software developers).

b) Staff carrying out supporting activities (qualifying indirect activities) for the R&D project (e.g. testing, data analysis, R&D reporting and maintenance of R&D equipment).

You cannot claim for staff activities that would have been carried out whether or not there is an R&D project. Examples of these include undertaking payroll activities and general administration. 

Apportionment is crucial—only the proportion of time spent on R&D can be included in R&D claims, so maintaining good records (such as time logs or project tracking systems) is essential. 

2. Staff supplied by an employment agency 

These are referred to as Externally Provided Workers (EPWs).

The cost of workers (EPWs) provided and paid by a third-party staff supplier (where you pay the supplier and they pay the employee), is allowable. But EPW costs are generally restricted to 65% of the qualifying expenditure, except where the staff supplier is a connected company. For connected companies the full R&D cost can be claimed, provided it was invoiced to the claimant company (as has always been the case). 

Caution: You must be able to demonstrate that any EPWs being claimed, were directly involved in R&D, under your day-to-day direction. There are restrictions on including such costs where the EPWs are based overseas and as such, not subject to UK payroll taxes.

3. Payments made to contractors for R&D

One of the key changes under the new regime is a broader scope for contracted out R&D. Companies can now claim for R&D activities that are contracted to third parties, regardless of whether the Contractor is an individual, company, or research organisation.

However, this area remains complex as in order to have the right to claim the costs of their Contracted-out R&D, the Client company hiring the Contractor must have expertise in the type of R&D being undertaken and be clear in their intention to contract out R&D. There are some scenarios where the Contractor has the right to claim costs for R&D undertaken as part of contract delivery; and both parties cannot claim the same costs. Like for EPWs, Contractor costs are generally restricted to 65% of the qualifying expenditure except where the Contractor is a connected company and there are restrictions on including costs where the Contractor is based overseas.

Important: Contractor costs should be clearly identified and supported by documentation. 

4. Consumable items

Costs for materials and energy used or transformed in the R&D process are claimable. This includes:

• Raw materials used in prototyping and testing.

• Heat, light and power used in labs or test environments.

However, any materials that are incorporated into goods that are to be sold are not eligible.

5. Software

Licence costs for software used in R&D is an allowable expense. This includes:

• Specialist development, modelling or simulation software.

• Data processing or analysis tools.

Apportionment remains critical—only the proportion of usage attributable to R&D can be included in your claim.  Licences for software incorporated into a final product and general office software costs are not allowable.

6. Data licence and cloud computing costs

Under the updated rules introduced in 2023, data licences and cloud computing services used in R&D are now explicitly eligible. This includes data storage, hardware facilities, operating systems and software platforms.  

Tip: Ensure you can clearly demonstrate how any costs claimed support your R&D objectives.

7. Clinical trials volunteers

For companies in the pharmaceutical, biotech and life sciences sectors, the new RDEC scheme continues to allow relief for certain clinical trial costs.

This includes payments made to:

• Volunteers or participants in clinical trials.

• Clinics or research organisations conducting trials on your behalf.

These costs can form a significant part of R&D expenditure, particularly in drug development or medical device testing. As with other cost categories, the expenditure must relate directly to qualifying R&D activities, such as trials aimed at testing efficacy, safety, or dosage.

Key point: Ensure contracts and trial protocols clearly demonstrate the connection to your R&D objectives and maintain detailed records of costs incurred.

Final Thoughts

The new RDEC scheme brings simplification but also introduces subtle shifts in what costs can be claimed and how costs must be justified. A clear audit trail, effective apportionment and accurate categorisation of spend are more important than ever. As HMRC increases its scrutiny of R&D claims, strong supporting evidence will be key to protecting your benefit.

If you need expert guidance on interpreting the RDEC rules or reviewing your cost base, get in touch. We can help to ensure your next claim is both robust and optimised under the new regime.

Read more on costs that qualify on HMRC's website.

Check R&D qualification criteria.