Quick answer: Qualifying expenditure is the statutory set of cost categories that can be included in an R&D tax relief claim: staff costs, externally provided workers, subcontractor payments, consumables, software, and from 1 April 2023 data and cloud computing costs. Each category has its own apportionment, connected-party and location rules.
What is qualifying expenditure?
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 does HMRC define qualifying expenditure?
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.
What does qualifying expenditure look like in practice?
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.
Worked example: extending the category breakdown
Add employer NIC explicitly: of the £700,000 staff-cost line, roughly £91,000 (at the 15% employer NIC rate from 6 April 2025) is NIC rather than gross salary and pension, illustrating why the staff-cost figure is a blended total, not a raw payroll number. The full £1,200,000 qualifying expenditure figure, at the merged scheme's 20% rate, produces a £240,000 credit - close to one and a half times the 2023-24 average blended claim of roughly £162,000 across all 46,950 claims HMRC processed that year, a reminder that this example represents an established engineering claimant, not a typical first-time claim.
How do the qualifying-expenditure categories interact?
Each qualifying category has its own apportionment and connected-party rules, but they share one principle: the cost must relate to activity that itself meets the eligible R&D activity test. A company assembling its first claim usually starts with staff costs, the largest category for most claimants, then layers in externally provided workers, consumables and, where relevant, data and cloud costs. Advisers typically build the qualifying-expenditure schedule category by category, cross-checking each line against the relevant CIRD reference, before totalling the figure that feeds the credit calculation - a process that takes materially longer for a first claim than for a repeat claimant with an established evidence trail.
Related terms
Frequently asked questions
Not in the revenue R&D relief claim itself - capital expenditure on assets used for R&D, such as lab equipment or specialist machinery, is excluded from qualifying expenditure but may separately qualify for 100% Research and Development Allowances, a distinct capital relief.
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.
No. Each category has specific rules on apportionment, connected parties, location of workforce and relation to the qualifying activity, so a cost cannot simply be totalled without checking which category it falls into.
Most claimants start with staff costs, the largest category for most companies, then layer in externally provided workers, consumables and, where relevant, data and cloud costs, cross-checking each line against the relevant CIRD reference before totalling the figure that feeds the credit calculation.