Qualifying costs: An overview of what can be claimed under the merged R&D tax relief scheme
With the implementation of the merged R&D tax relief scheme, it is important for businesses to understand which costs are eligible for relief to maximise the financial benefit of their claims.
What are qualifying costs?
Qualifying costs are those directly attributable to activities seeking to achieve a scientific or technological advance, where the outcome was uncertain at the outset and required skilled problem-solving.
Categories of eligible expenditure
To help businesses navigate the new scheme, here’s a summary of the main qualifying cost categories:
- Staff costs: Salaries, wages, employer’s National Insurance contributions, and pension contributions for employees directly engaged in R&D. This also includes certain reimbursed expenses incurred while undertaking R&D work
- Consumables: Materials and resources used up in the R&D process, such as chemicals, components, and utilities like water, fuel, and power. Expenditure on prototypes or testing materials that are not intended for commercial sale may be eligible, provided they are used in the qualifying R&D activity
- Software: The cost of software licences used specifically for R&D purposes, including cloud computing and data costs where directly relevant to the project
- Subcontractor and externally provided worker (EPW) costs: Payments to subcontractors and third-party workers engaged in eligible R&D activities, subject to certain restrictions and conditions under the merged scheme
- Payments to clinical trial volunteers: For companies in the life sciences sector, payments made to volunteers for participating in clinical trials are allowable
Recent changes and points to consider
The merged scheme has introduced greater clarity and consistency regarding which costs are eligible, helping businesses of all sizes, from SMEs to large corporations, plan their R&D investments with confidence. However, some changes may affect the scope of claims and there are still some points to consider that have carried over from the old rules:
- Overseas costs: New rules may restrict the inclusion of certain overseas third-party costs, so it’s important to review your supply chain and clarify eligibility early on
- PAYE/NIC cap: There is a cap based on the company’s PAYE and NIC liabilities, which may limit the amount that can be claimed, especially by businesses with a high proportion of subcontracted work
- Connected party rules: Costs incurred via connected parties or group companies must meet additional requirements to be included
- Qualifying indirect activities: Certain indirect activities such as maintenance, security, administration, and clerical services can qualify where they support the R&D undertaken
Calculating and documenting qualifying expenditure
Accurate calculation and detailed documentation of qualifying costs are essential. Businesses should:
- Keep thorough records of all R&D activities and related expenditure
- Clearly separate eligible R&D costs from general business expenses
- Ensure that staff time, consumable usage, and third-party costs are properly allocated and justified
Looking ahead: Maximising your claim
As the merged R&D tax relief scheme becomes an increasingly important pillar of the UK’s innovation strategy, understanding and correctly identifying qualifying costs will be key to unlocking the full value of the scheme. By staying informed and maintaining robust records, businesses can ensure their claims are both accurate and comprehensive, helping them remain competitive and ready for future growth.
To download the full merged R&D tax relief scheme document, please click here.
If you wish to discuss this in further detail, please contact one of our Business Tax experts here.
