What is qualifying expenditure for R&D tax credits?
Answered 17 March 2026
Qualifying Expenditure for R&D Tax Credits
What the law says
The categories of qualifying expenditure for R&D tax relief are set out in CTA 2009, Part 13. For in-house R&D, expenditure qualifies if it meets the following conditions:
Condition A – the expenditure is attributable to relevant research and development undertaken by the company itself.
Condition B – the expenditure falls within one of the following categories (CTA 2009 s.1052(3)):
- (a) Staffing costs (s.1123) — amounts paid to directors/employees as monetary earnings, expense reimbursements, secondary Class 1 NICs, compulsory EEA/Swiss social security contributions, and pension fund contributions;
- (b) Software, data licences, cloud computing services or consumable items (s.1125) — amounts paid in respect of computer software, data licences (licences to access and use a collection of digital data), cloud computing services (including remote data storage, hardware, operating systems and software platforms), or consumable/transformable materials (including water, fuel and power);
- (c) Qualifying expenditure on externally provided workers (ss.1127–1131); and
- (d) Relevant payments to the subjects of a clinical trial (s.1140).
Condition C – the R&D must not be contracted out to the company (s.1133).
Condition D – the expenditure must not be attributable to an exempt foreign permanent establishment (s.1138B).
For contracted-out R&D, separate provisions apply (CTA 2009 s.1053 for ERIS/SME scheme; s.1042E for new RDEC), and contractor payments are governed by ss.1133–1136.
HMRC guidance / practice
How the relief works
The R&D tax credit works by allowing companies an increased, or enhanced, deduction in respect of qualifying expenditure on R&D activities. The enhanced deduction either reduces the company's profit, or increases its losses, for tax purposes. SMEs may be able to claim payable tax credits in cash from HMRC if they have losses in the accounting period, but the enhanced relief must be surrendered in order to receive this payment.
Schemes available
There are two current schemes:
- New merged scheme RDEC (Chapter 1A of Part 13, CTA 2009) — available to all companies including large companies;
- Enhanced R&D Intensive Support (ERIS) (Chapter 2 of Part 13, CTA 2009) — available only to loss-making R&D-intensive SMEs for accounting periods beginning on or after 1 April 2024.
Companies may be eligible to claim under both schemes, but may not claim under more than one scheme for the same qualifying expenditure.
Categories of qualifying expenditure — key points
HMRC maps the qualifying expenditure categories to the following legislative references:
| Category | Legislation (CTA 2009) |
|---|---|
| Staffing costs | ss.1123–1124 |
| Software, data licences, cloud computing, consumables | ss.1125–1126B |
| Externally provided workers | ss.1127–1132A |
| Contractor payments | ss.1133–1136 |
| Clinical trial subjects | s.1140 |
Data licences and cloud computing were added as qualifying categories for accounting periods commencing on or after 1 April 2023.
Consumable items restriction — where a company sells or otherwise transfers ownership of its R&D activity as part of its ordinary business, the cost of materials that go to make up those products is excluded from qualifying expenditure. This applies to expenditure incurred on or after 1 April 2015.
Payment requirement — the underlying legislation requires not only that expenditure be incurred, but also that it be actually paid before a claim to R&D tax relief can be valid. This applies to staffing costs, externally provided workers, subcontracted R&D, clinical trial subjects, contributions to independent R&D, and (for periods beginning on or after 1 April 2023) software, data licences and cloud computing services.
Overseas expenditure — contractor and externally provided worker payments are subject to overseas restrictions (CIRD150000) unless an exception applies.
Citation sources
y has been articulated, the scope of the R&D project has been defined, and the project activities which fall within the definition of R&D for tax purposes have been identified, then the tax rules in CTA2009, described in this guidance, sets out what expenditure on those activities may be eligible for relief, and the conditions that must be satisfied for the expenditure to qualify for relief. There are two schemes depending on whether the R&D is carried out by a company that is an SME or any comp
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S357BLB CTA10 D is the company’s qualifying expenditure on relevant R&D undertaken in house which means the expenditure incurred by the company during the relevant period and meeting conditions A and B below: Condition A –: it is incurred on staffing costs, software or consumable items, externally provided workers or relevant payments to the subjects of clinical trials. Expenditure within Condition A refers directly to expenditure treated as R&D in accordance with generally accepted accounting p
The Finance Act 2024 modified Chapter 2 of Part 13 of the Corporation Tax Act 2009 (CTA09) to make provision – known as enhanced R&D intensive support (ERIS) - for loss-making R&D-intensive SMEs with effect for accounting periods beginning on or after1 April 2024. The commencement date of 1 April 2024 was defined in Treasury regulations issued on 4 March 2024 (SI2024/286). Retrospective provision (enhanced support for R&D intensive SMEs), permitting SMEsto claim the higher tax credit rate of 14.
curred before they came into force has to be tested against the old rules. Changes to categories in FA06 - expenditure on clinical trial volunteers A new category of qualifying expenditure for expenditure on subjects of clinical trials was introduced for expenditure incurred after 1 April 2006 for large companies and expenditure incurred on or after 1 August 2008 for SME companies (CIRD84400). Payment Where the underlying legislation requires not only that there be expenditure, but also paym