Qualifying R&D Costs in 2025
Written by:
Daniel Scott
Partner & Head of Accounting
What You Can and Cannot Claim Under the New Merged Scheme
Once you understand what actually counts as R&D, the next big question is simple but important: what costs can you include in your claim, and what must be left out?
Under the UK’s merged R&D scheme, which applies to accounting periods beginning on or after 1 April 2024, the categories of qualifying expenditure are broadly familiar, but some details have changed:
- Data and cloud computing costs are now fully recognised.
- Subcontractor and overseas rules have tightened.
- HMRC has clarified what is definitely out of bounds.
For tech and SaaS founders, this matters. How you treat staff time, contractors, cloud platforms, and grants can add or remove tens of thousands from your claim. This guide walks through each major cost category, explains how it works under the merged scheme, and highlights common pitfalls.
Main Categories of Qualifying R&D Costs
HMRC recognises specific cost categories for R&D tax relief. For accounting periods starting on or after 1 April 2023, this includes:
- Staffing costs
- Externally provided workers (EPWs)
- Subcontracted R&D
- Consumables and materials
- Software, data licences, and cloud computing
- Payments to clinical trial subjects
From 1 April 2024, these categories sit within the merged R&D scheme and Enhanced R&D Intensive Support. A key change: there is no blanket restriction on claiming subsidised costs, though grants and subsidies still need to be disclosed and correctly apportioned.
Important: If a cost does not fall into one of HMRC’s listed categories, it cannot be included in an R&D claim, no matter how “R&D-ish” it feels.
1. Staffing Costs: The Core of Most Tech Claims
Staffing costs are usually the backbone of R&D claims. Qualifying costs include:
- Salaries
- Employer NIC
- Employer pension contributions
- Certain reimbursed expenses
These apply to employees directly engaged in R&D, e.g., engineers, data scientists, technical architects, dev-ops, and sometimes product leads or technical founders.
Proportional claim example:
- If a lead engineer spends 60% of their time on experimental algorithm design and 40% on production support, only 60% of their staffing costs are claimable.
Non-qualifying roles:
- Dividends, general HR staff, sales, marketing, or purely administrative roles (unless a very small portion of time is genuinely R&D-related).
2. Externally Provided Workers (EPWs)
EPWs are individuals on another company’s payroll but working under your direction.
Eligibility rules under the merged scheme:
- Location matters: Overseas EPWs usually do not qualify, unless the R&D cannot reasonably be carried out in the UK.
- UK PAYE and NIC: The worker’s earnings must be subject to UK PAYE and Class 1 NIC.
- Unconnected providers: Generally restricted to 65% of payment attributable to R&D work.
Practical takeaway: Review contractor arrangements carefully, especially overseas, to confirm qualifying spend.
3. Subcontracted R&D
Subcontracted R&D can be complex. Key points under the merged scheme (from 1 April 2024):
- The SME vs. RDEC distinction is largely gone.
- Eligibility depends on who decided to carry out the R&D and who planned the work.
- Only the company making these decisions can claim subcontracted costs.
- Overseas subcontractor costs generally do not qualify, unless UK conditions cannot be reproduced.
Many UK startups prefer UK-based subcontractors for IP protection and R&D relief.
4. Software, Data, and Cloud Computing Costs
Modern R&D relies heavily on cloud and data pipelines. HMRC recognises:
- Data licences: Fees for datasets used in R&D (e.g., training ML models).
- Cloud computing: Storage, virtual machines, operating systems, and platforms used in R&D.
Claimable costs: Directly used for qualifying R&D.
Non-claimable costs: Non-R&D parts of the business or routine hosting of live products.
Tip for SaaS: Segment cloud spend between R&D environments and production hosting.
5. Consumables, Materials, and Prototypes
Consumables are materials used up or transformed in R&D, including:
- Prototype hardware boards
- Chemicals or components
- Third-party API credits for testing
Key test: The item must be consumed in the experiment, not become a finished product sold to customers.
Once a prototype becomes a product or capital asset, that portion is excluded.
6. Clinical Trial Volunteers
Relevant for life sciences, not software companies. Payments to trial subjects remain qualifying expenditure if related to eligible R&D.
7. Grants, Subsidies, and the Merged Scheme
Under the old SME regime, grants could restrict claims. Under the merged scheme:
- No blanket restriction on subsidised costs.
- Grants must still be disclosed, and double-claiming must be avoided.
Costs You Cannot Claim
HMRC explicitly excludes:
- Production and distribution of goods/services
- Capital expenditure on plant, machinery, or buildings
- Cost of land
- Patents and trademarks
- General rent, rates, or leasing costs
Capital expenditure may qualify for separate R&D capital allowances, but not under the merged R&D scheme.
Practical Approach to Cost Mapping
- Start with the project narrative.
- Map staff time, contractors, cloud usage, and materials to specific R&D activities.
- Document allocations with timesheets, sprint boards, or statements of work.
- Segment cloud spend into R&D vs. production.
Accuracy matters more than ever under the merged scheme, especially for overseas and subcontracted costs.
Why This Matters
The merged scheme and Additional Information Form mean HMRC focuses on evidence, not just numbers.
- Poorly allocated costs or overseas contractors without justification increase enquiry risk.
- Clear documentation improves the chance of a smooth claim.
💡 To help you get started, we’ve put together a simple checklist to map your qualifying costs and make your R&D claim easier.
Ready to Review Your R&D Cost Base?
If you are not sure which of your costs qualify under the merged scheme, we can help.
At
OnTheGo Accountants, we help tech and SaaS founders:
- Review projects and identify qualifying R&D activities
- Map staff, contractor, cloud, and consumable costs
- Handle overseas and subcontractor complications
- Prepare Additional Information Forms and supporting reports
If we think a cost or even an entire project does not meet the standard, we will tell you. Protecting the integrity of your claim is more important than inflating the number on the tax return.
Contact:
info@onthegoaccountants.co.uk to book a
free 30-minute R&D consultation.
