Qualifying R&D Expenditure: Which Costs Can You Claim?
Understand potentially qualifying R&D costs, calculate reasonable allocations and prepare supporting records.
Last reviewed 23 October 2026Not every cost associated with an innovative project qualifies. HMRC applies specific rules to different categories, and those rules can vary by accounting period and scheme.
1. What is qualifying R&D expenditure?
Spending that meets relevant tax rules, relates to eligible R&D and falls within an allowed category. Where resources serve both R&D and ordinary business, only the qualifying proportion should be included. Keep records explaining the amount.
2. Employee and staffing costs
Depending on the rules, qualifying staffing costs may include:
- Gross salaries and wages
- Relevant employer National Insurance contributions
- Employer pension contributions
- Certain bonuses and other qualifying staffing expenditure
Only the appropriate proportion for qualifying R&D should be included.
Example: Employee R&D allocation
An engineer has £50,000 in eligible annual employment costs. Documented activities support a 40% allocation to qualifying R&D.
£50,000 × 40% = £20,000 proposed qualifying staffing expenditure.
This illustrates allocation, not eligibility. The costs, activities and percentage must be supportable.
3. Contractors and externally provided workers
Payments for contracted-out R&D or externally provided workers may qualify subject to distinct conditions. For periods beginning on or after 1 April 2024, important factors include who decided and planned the R&D, contractual arrangements, connected parties and overseas activity.
Qualifying payments to unconnected contractors are generally subject to a 65% restriction; this does not mean 65% of every supplier invoice qualifies. The underlying activity and contract conditions must first qualify. Review agreements, invoices and responsibilities.
4. Consumable materials
Certain materials used up or transformed during qualifying R&D may qualify, such as experimental materials, chemicals, components consumed during tests and relevant fuel, power or water. Restrictions apply, including where materials are sold or transferred. Ordinary production expenditure is not automatically R&D expenditure.
5. Software costs
Software licence expenditure may qualify where used for eligible R&D. If used for both R&D and other work, calculate a reasonable allocation. Ordinary administrative software is not automatically qualifying merely because the business undertakes R&D.
6. Data licences and cloud computing
For accounting periods beginning on or after 1 April 2023, certain data licence and cloud computing expenditure can qualify, subject to exclusions and restrictions. Examples may include eligible data access and computing infrastructure used for qualifying R&D.
7. How to allocate shared costs
| Allocation basis | Example |
|---|---|
| Employee activity estimate | Share of relevant working time on qualifying R&D |
| Usage-based allocation | Share of software or cloud use attributable to R&D |
| Quantity or consumption basis | Materials consumed in eligible experiments |
| Project-activity basis | Costs linked to identified qualifying activities |
| Invoice-line allocation | Specific eligible items in a supplier invoice |
These are practical recordkeeping approaches, not separate HMRC-approved cost categories. Choose a method suitable for the cost and available evidence.
8. Do you need timesheets?
Formal timesheets can help, but credible project records, task descriptions, work schedules, technical reports and reasonable documented estimates may also help substantiate allocations, depending on circumstances. Do not select a percentage simply to increase the claim.
9. What records should you keep?
- Payroll and pension records
- Contractor invoices and agreements
- Supplier invoices and purchase records
- Project descriptions and activity records
- Software and cloud usage records
- Material consumption records
- R&D allocation calculations
- Explanations of allocation methods
Records should be consistent with the technical activities described.
10. How Plio helps with this
Plio helps collect cost information, identify potentially qualifying expenditure and document proposed allocations from existing business records. It does not automatically certify expense eligibility or amounts HMRC will accept.
Organise your R&D costs with step-by-step guidance.
Official HMRC references
General information. Expenditure rules depend on the accounting period, scheme, contract terms and circumstances.
Published by: Plio — Paylists LTD
Prepared and reviewed by: Muly Zohar, Founder & Product Architect
Last published:
Sources: Official HMRC guidance and other references linked in this article.
General information only. Plio is not a tax advisory service. Read about our content responsibility and review