Qualifying Costs for R&D Tax Relief: Staff, Consumables and Subcontractors

The main qualifying costs for R&D tax relief are staff costs, externally provided workers, subcontractor payments, consumable items, software, and data and cloud computing costs, provided they relate directly to resolving a scientific or technological uncertainty. Getting the cost categories right is what separates a robust claim from one that invites an HMRC enquiry. For companies exploring R&D tax credits SME UK 2026 claims, the value hinges not on the idea itself but on correctly identifying, apportioning and evidencing each pound of qualifying expenditure. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, prepares and defends R&D claims for limited company owners across the UK. This guide explains which costs qualify under the merged scheme that now applies, how each category is treated, and where claims most often go wrong.

Key Takeaways

• Qualifying R&D costs fall into six categories: staff costs, externally provided workers, subcontractors, consumable items, software and data, and cloud computing.
• The merged R&D scheme applies a single 20% expenditure credit for accounting periods beginning on or after 1 April 2024, giving a net cash benefit of roughly 15% for a company paying 25% corporation tax.
• Subcontractor and externally provided worker costs are generally restricted to 65% of the qualifying payment.
• Loss-making R&D-intensive SMEs, where qualifying R&D is at least 30% of total expenditure, can claim Enhanced R&D Intensive Support worth up to around 27p per £1 spent.
• Overseas subcontractor and externally provided worker costs are generally excluded for accounting periods beginning on or after 1 April 2024, unless strict conditions are met.
• A claim must be supported by a mandatory Additional Information Form submitted to HMRC before the corporation tax return, and many companies must first submit a claim notification.

What Is R&D Tax Relief and Which Scheme Applies in 2026/27?

R&D tax relief is a corporation tax incentive that rewards limited companies for resolving scientific or technological uncertainties, and in 2026/27 almost all claims fall under the single merged scheme. The merged scheme replaced the separate SME and RDEC scheme HMRC arrangements for accounting periods beginning on or after 1 April 2024, so any period falling in the 2026/27 tax year uses it.

Under the merged scheme, qualifying expenditure attracts a 20% above-the-line expenditure credit. The credit is itself taxable, so the net benefit depends on the company's corporation tax rate. A profitable company paying the 25% main rate receives a net cash benefit of about 15p for every qualifying £1, while a company paying the 19% small profits rate keeps slightly more.

A separate route, Enhanced R&D Intensive Support (ERIS), remains for loss-making SMEs whose qualifying R&D is at least 30% of total expenditure. Whichever route applies, research development tax relief rewards the same underlying activity: resolving genuine technological uncertainty. For a full overview of how the schemes fit together, see our guide to R&D tax credits for small businesses.

How Are Staff Costs Treated in an R&D Claim?

Staff costs are usually the largest category in an R&D claim and cover the gross salaries, employer National Insurance, and employer pension contributions of employees directly engaged in the research and development. Where an employee splits their time between R&D and routine work, only the R&D proportion qualifies, so a credible time apportionment is essential.

Reimbursed business expenses paid to those staff, such as travel and materials, can also form part of the qualifying staff cost. Dividends paid to director-shareholders do not qualify, because they are a return on shares rather than remuneration for work, which is a common reason owner-managed company claims are reduced on review.

Externally provided workers, typically agency staff supplied to work under the company's supervision, are a separate category. Their cost is restricted to 65% of the payment where the parties are unconnected, reflecting the agency's assumed margin.

Which Consumables, Software and Cloud Costs Qualify?

Consumable items qualify where they are physically used up or transformed in the R&D process, and this now sits alongside software, data and cloud computing costs. Consumables cover materials, along with the water, fuel and power consumed directly in carrying out the research. Items that survive the R&D intact, or that are sold on as part of a commercial product, generally do not qualify.

Since the scheme was modernised, expenditure on software licences, datasets and cloud computing used directly for R&D also qualifies. This matters for technology and data-driven businesses, where a large share of research now runs on cloud infrastructure and purchased data rather than physical materials.

A worked example shows the mechanics. A Guildford software SME spends £200,000 of qualifying R&D in 2026/27, made up of £150,000 staff costs, £20,000 cloud computing, and £30,000 of subcontractor work restricted to 65% (£19,500 qualifying, giving a revised total of £189,500). The 20% expenditure credit is £37,900. After corporation tax at 25% on the credit, the net cash benefit is around £28,425, or roughly 15% of qualifying spend.

How Are Subcontractor and Overseas Costs Treated?

Subcontractor costs qualify under the merged scheme where the company itself decides to undertake the R&D and contracts the work out, and the payment is generally restricted to 65% of the amount paid to an unconnected subcontractor. The merged scheme changed who may claim: broadly, the company that makes the decision to carry out the R&D claims the relief, rather than the party physically performing the work.

A significant restriction applies to location. For accounting periods beginning on or after 1 April 2024, subcontractor and externally provided worker costs are only qualifying where the work is carried out in the UK, subject to narrow exceptions where the necessary conditions, such as specific expertise or a regulatory requirement, cannot reasonably be replicated in the UK.

First-time claimants, and companies that have not claimed recently, must submit a claim notification to HMRC within six months of the accounting period end, or the claim is invalid. Every claim also requires a mandatory Additional Information Form filed before the corporation tax return. Advance assurance remains available for eligible first-time SME claimants, giving certainty for the first three accounting periods.

Frequently Asked Questions

What costs can I claim for R&D tax relief?

You can claim qualifying staff costs, externally provided workers, subcontractor payments, consumable items such as materials, water, fuel and power, and software, data and cloud computing costs. Each cost must relate directly to resolving a scientific or technological uncertainty, and mixed-use costs must be apportioned to the R&D element only.

Do director salaries qualify for R&D tax credits?

Director salaries qualify for R&D tax relief to the extent the director is directly engaged in the research and development, including their gross salary, employer National Insurance and employer pension contributions. Dividends paid to director-shareholders do not qualify, because they are a return on shareholding rather than payment for work performed.

How much is R&D tax relief worth in 2026/27?

Under the merged scheme applying in 2026/27, qualifying R&D expenditure attracts a 20% expenditure credit. Because the credit is taxable, the net cash benefit is around 15p per qualifying £1 for a company paying 25% corporation tax. Loss-making R&D-intensive SMEs can claim Enhanced R&D Intensive Support worth up to around 27p per £1.

Can I claim R&D tax relief for overseas subcontractors?

Overseas subcontractor and externally provided worker costs are generally excluded for accounting periods beginning on or after 1 April 2024. Relief is only available where the work must be carried out abroad because the required conditions, such as geography, specific expertise or regulatory factors, cannot reasonably be replicated in the UK. Most routine overseas outsourcing no longer qualifies.

What paperwork does HMRC require for an R&D claim?

HMRC requires a mandatory Additional Information Form submitted before the corporation tax return, setting out the projects, the qualifying costs and the technological uncertainties addressed. Many companies, including first-time and lapsed claimants, must also submit a claim notification within six months of the accounting period end, or the claim will be rejected.

How Blue Tick Can Help

Blue Tick Accountants prepares robust R&D tax relief claims for SMEs, identifying every qualifying cost across staff, consumables, software and subcontractors while keeping each claim defensible under HMRC's tighter compliance regime. The team handles the technical narrative, the cost apportionment, the Additional Information Form and any claim notification, so your claim maximises value without inviting an enquiry. Head to our website and book a meeting now.

Conclusion

Qualifying costs are the foundation of any R&D claim, and the six categories, staff, externally provided workers, subcontractors, consumables, software and cloud, each carry their own rules and restrictions. The merged scheme's 20% credit, the 65% restriction on outsourced work, and the new UK-only rule on overseas costs all shape the final figure. Identify and evidence your costs carefully, file the required forms on time, and take advice before submitting to protect the value of your claim.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners, landlords and the self-employed across the UK claim the reliefs they are entitled to. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: R&D Tax Credit Claims: How to Prepare a Robust Technical Narrative.