Before identifying your qualifying R&D costs you'll need to ensure that your business activities constitute R&D projects. In order to do that we recommend reading our guide on the subject.
Once you've identified your R&D projects you can then associate costs with them. This guide takes you through the most common costs businesses claim for:
Items that are directly employed and consumed in the R&D projects can also qualify. They include physical materials and hardware, as well as utilities such as the power, water and fuel used directly in the R&D. Proportioning consumables to your R&D activity can be tricky, so we recommend reading HMRC's advice on that.
You can claim the cost of software used in your R&D projects. If you use the same software for business-as-usual activity, then you should include an appropriate proportion of the software's cost in your claim.
You can often include the cost of designing and constructing a prototype. However, the purpose of the prototype must be to resolve some scientific or technological uncertainty. If you design the prototype for a commercial function (eg. as a demonstration model at a trade show) then it cannot qualify. Equally, if you later sell the prototype to a customer then the cost of the build cannot qualify as R&D (although there may have been R&D involved in developing the prototype!). HMRC will argue that you've resolved any technological uncertainty if you're confident enough to sell it to a customer.
These are the costs paid to a third party for staff who are directly involved with the R&D project. They are not employees or subcontractors. In most cases you can claim up to 65% of the payments made to the external staff provider.
As a rule of thumb, you can claim 65% of the payments made to "unconnected" subcontractors in the SME scheme. However, you can qualify up to 100% of the expenditure if the subcontractor is a connected party (i.e. a parent company, a subsidiary etc.). If you plan to claim for subcontractor costs then consult our guide before doing so.
Research contributions are payments made to third party organisations to conduct research on your behalf. Large companies can claim these as an eligible R&D cost, but not SMEs. The research must be relevant to your field or scientific pursuit. An "individual or partnership of individuals", or "a qualifying body" must conduct the research. A qualifying body would be a charity or higher education institute, or a named scientific research body. In most cases, the organisation needs to be based in the UK but HMRC provides a list of some qualifying overseas bodies.
Clinical trials are of course essential for pharmaceutical R&D. However, the costs are not covered by the other categories. Businesses can claim for the costs associated with both attracting and paying for the volunteers. HMRC has a guide on this matter, which we recommend consulting.
Companies will be able to claim relief against the costs associated with using third-party resources and services in the acquisition, analysis and storage of big data, making greater use of digital twinning, simulation and prototyping amongst other things. To learn more, here is a guide on this matter.
To help match the growing volume of R&D fueled by mathematical advances, the definition of R&D tax relief will be expanded to include pure mathematics as a qualifying cost.
This will benefit developing industries in which the UK has a competitive advantage, such as Artificial Intelligence, quantum computing and robotics, while also supporting strong sectors like manufacturing and design. To learn more, here is a guide on this matter.