Definition
Qualifying expenditure is the set of cost categories defined by statute that a company can include in a research and development tax relief claim. The main categories are staff costs, externally provided workers, subcontractor payments, consumable items, software licences, and from 1 April 2023 data and cloud computing costs. Each category has specific rules on apportionment, connected parties, location of workforce and relation to the qualifying activity. Capital expenditure is excluded from revenue R&D relief but may attract separate Research and Development Allowances.
How HMRC defines it
HMRC guidance on qualifying expenditure is at CIRD82000 onwards of the CIRD Manual, with dedicated sections for staff costs (CIRD83000), externally provided workers (CIRD84000), consumables (CIRD82300), software and data (CIRD82500), and subcontractors (CIRD84200). The statutory framework is in sections 1123 to 1132 of the Corporation Tax Act 2009.
Practical example
An engineering SME with a £1,200,000 R&D cost base identifies £700,000 of staff costs, £250,000 of externally provided workers at 65%, £150,000 of consumables and £100,000 of cloud computing costs. The qualifying expenditure of £1,200,000 forms the base for the merged scheme 20% credit, producing a pre-tax credit of £240,000.