Many businesses that claim R&D tax credits get their claim value wrong, not because their work doesn't qualify, but because they're unsure which costs are eligible and how to fairly split them between R&D and everything else. That process of splitting is called apportionment, and getting it right is one of the most important parts of building a robust, compliant claim.
This guide covers every major cost category and explains how to approach apportionment for each.
What does 'apportioning' costs actually mean?
Apportionment simply means applying a fair, supportable percentage of a cost to your qualifying R&D activity. Very few employees, software licences, or consumables are used exclusively for R&D, so HMRC expects you to include only the portion that genuinely relates to qualifying work.
HMRC requires that any estimates or apportionments are made on a 'just and reasonable basis'. That means a clear, consistent method you can explain and evidence if HMRC asks. Crucially, you must keep records of your apportionment methodology in case of a compliance check. One of HMRC's first questions in an enquiry is often: where did these numbers come from?
Your methods need to be consistent within each cost category, but they may vary across cost categories. You can pick the apportionment method that suits your projects best.
Importantly, if you have multiple R&D projects, you should be apportioning your R&D costs against the different projects, as this analysis is required in your Additional Information Form submission.
The eligible cost categories are staff costs, subcontractor costs (or contributions to independent R&D for RDEC claimants), externally provided workers, software licences, data licences, cloud computing costs, consumable items and, in certain cases, clinical trial volunteer costs. For a detailed breakdown of what qualifies as R&D under HMRC's definition, see our dedicated guide.
How to apportion staff costs
Staff costs are usually the largest component of an R&D claim. Eligible costs include salaries and wages, employer National Insurance contributions, employer pension contributions and any bonuses.
Common qualifying roles include software developers, data scientists, engineers, scientists, technical architects, product designers and project managers involved in overseeing technical or scientific work. Support roles, like QA testers or lab technicians, can also qualify where they directly contribute to the R&D activity.
Since most employees split their time across R&D and other activities, you'll need to apportion their costs by estimating what percentage of their working time was spent on qualifying R&D.
Timesheets are the gold standard
The most straightforward way to evidence staff time is through timesheets. If your team logs time against projects, R&D work should be clearly tagged or categorised.
HMRC regards contemporaneous timesheets as the strongest form of evidence. If your business doesn't currently track R&D time, it's worth implementing even a basic system going forward; see our guide on R&D tax credits and timesheets for practical options.
Estimating staff time without timesheets
If formal time records don't exist, that doesn't mean you can't claim. Retrospective estimates based on discussions with staff and management are widely accepted, provided they're credible and consistently applied. A typical process looks like this:
- Identify which projects involved technological or scientific uncertainty and therefore qualify as R&D.
- Map which employees contributed to those projects.
- Estimate, using management interviews, team workshops or reviews of sprint and project documentation, how much of each person's time was spent on qualifying R&D activity.
Those percentages are then applied to each employee's eligible annual employment cost. For example, if a developer's total employment cost is £70,000 and they spent an estimated 60% of their time on R&D, the qualifying staff cost is £42,000.
A typical breakdown across a small team might look like this:
|
Employee |
Role |
Estimated R&D Time |
|
Senior Developer |
Product development |
70% |
|
Software Engineer |
Feature implementation |
60% |
|
CTO |
Technical oversight |
25% |
|
QA Engineer |
Testing prototypes |
40% |
Percentages should reflect individual roles and real working patterns. You should avoid applying identical figures across the whole team without good reason, as this can attract scrutiny.
Will HMRC reject our claim if we estimated time?
No, provided the methodology is reasonable. HMRC is aware that many SMEs don't track R&D time formally. What they look for is a clear explanation of how estimates were reached, consistency across staff calculations, sensible percentages that reflect real working patterns and supporting documentation where available.
Claiming that a finance manager spent 80% of their time on R&D would raise questions. Claiming that a lead developer spent 65% of their time building a genuinely novel product feature is entirely credible. The goal is to show the claim is carefully prepared, not inflated.
However, if R&D is expected to be a large part of your company’s future, you should definitely consider implementing a timesheeting solution to make your tax credit claim preparation easier.
How to apportion subcontracting costs
If your business contracts third parties to carry out work that contributes to your R&D project, those costs may be partially claimable.
A 65% cap applies to subcontractor costs, meaning you must apply a limit of 65% to qualifying subcontractor expenditure. This ensures that HMRC is not providing tax credits for the commercial markup of your contractors.
The exception to this rule is for connected third parties (e.g., in the same group); you may be able to include the entire invoice for a connected subcontractor if the invoice does not include a profit markup.
If a subcontractor was brought in solely to work on your R&D project, it's possible the entire invoice could be included (subject to the 65% cap). Where the same subcontractor worked on both R&D and non-R&D activities, you'll need to apportion the cost and then apply the 65% cap. This is usually done based on estimates by the team managers or project leads who oversaw the work.
One important nuance: the work the subcontractor carries out doesn't itself need to constitute qualifying R&D. For example, a pharmaceutical company might contract a third-party laboratory to test a new drug's shelf life. That testing process is well-established for the lab, as it involves no uncertainty on their side. But it still contributes to the pharmaceutical company's R&D project, and the cost can therefore be included in the claim.
As with staff costs, the key is to document your reasoning. Keep contracts, statements of work and invoices that make clear what the subcontractor was engaged to do.
How to apportion externally provided workers (EPW) costs
Externally provided workers, often placed through agencies, are different from subcontractors. The key distinction is direction and control: an EPW works under the direction of your company, just like an employee, whereas a subcontractor typically determines their own methods. For a fuller explanation of how these two categories differ, see our guide on R&D tax credits: subcontractors and EPWs.
Apportionment for EPWs follows the same logic as for directly employed staff: you estimate what percentage of their time was spent on qualifying R&D and apply that to the agency invoice. However, the 65% cap also applies to EPW costs, which adds an extra layer to the calculation: you first apportion the cost to R&D, then apply the 65% rule to the qualifying portion.
As with staff estimates, management interviews and project records are the most common way to support EPW apportionments where formal time tracking doesn't exist.
How to apportion software costs
Software licences, data licences and cloud computing costs can all be included in an R&D claim where they are used directly in qualifying R&D activity. The challenge is that most of these costs serve a broader purpose, so apportionment is almost always required.
Software licences
If a licence is used partly for R&D and partly for routine development, support or commercial delivery, you need to apportion it. Common approaches include applying the ratio of R&D staff to total staff who use the software, or estimating the percentage of usage time that relates to qualifying activity. For example, if a code analysis tool is used by ten developers, six of whom are working on qualifying R&D, you might include 60% of the licence cost.
Data licences
Data licence costs can be included where the data is used directly in R&D activity; for example, training a machine learning model or running scientific simulations. Data used for analytics, marketing, business intelligence or general operations doesn't qualify.
Apportion based on how the data is actually used across your projects, and document that reasoning clearly with reference to the specific R&D activities involved.
Cloud computing costs
Cloud infrastructure costs (AWS, Azure, GCP and equivalents) can be included where they are attributable to qualifying R&D. The most straightforward way to do this is through project tagging in your billing account, which lets you isolate spend by environment or project. Separate development or test environments used exclusively for R&D are easier to apportion cleanly.
Costs relating to live or production systems generally don't qualify; it's the compute used in the process of developing and testing that matters, not the infrastructure serving finished products to end users.
How to apportion consumables
Consumables are materials that are used up or transformed in the course of R&D. This includes things like raw materials, chemicals, components used in prototyping, or utilities such as power, water and fuel consumed directly during experiments or testing.
Where consumables are used across both R&D and production or commercial activities, you'll need to apportion them.
For materials, the most common method is to track which purchase orders or material batches were allocated to qualifying R&D projects. Production logs and lab records can also help demonstrate which activities the materials supported.
For utilities, an estimate based on the proportion of time used for R&D (versus routine production) is typically acceptable. For example, if your R&D staff costs make up 35% of your total staff costs for the year, you could apply that percentage to your utilities.
One important rule: if a prototype or any material transformed during R&D is later sold, the associated costs can’t be included in the claim. HMRC’s reasoning is that costs recovered through a sale aren't a net expense to your business.
What evidence do you need to support your apportionments?
You don't need perfect records but you do need something. HMRC expects to see that your apportionment figures are grounded in real evidence, not guesswork.
Below is a summary of the most useful evidence types for each cost category:
|
Cost type |
Evidence examples |
|
Staff |
Timesheets, sprint boards, Jira, GitHub commit logs, management interviews |
|
Subcontractors & EPWs |
Contracts, statements of work, invoices, project correspondence |
|
Software & data licences |
Licence agreements, usage logs, user lists, cloud billing reports |
|
Cloud computing |
AWS/Azure/GCP billing reports, project tags, environment breakdowns |
|
Consumables |
Purchase orders, lab records, production logs, prototype documentation |
Even where direct evidence is limited, indirect sources such as sprint boards, release notes, design documents and informal project correspondence like emails or Slack and Teams messages can be useful to corroborate your estimates.
Common mistakes when apportioning R&D costs
These are the most frequent errors we see when businesses prepare their own apportionments:
- Overestimating staff involvement. High percentages across a large number of employees without strong supporting evidence is one of the most common triggers for an HMRC enquiry.
- Not validating estimates with management. Percentages should be reviewed and signed off by someone with direct knowledge of how each employee spent their time, not just assumed.
- Including the full cost of software or licences used for both R&D and routine work. Even if a tool is essential to your R&D, if it serves a broader purpose, you should only claim the qualifying portion.
- Claiming the full subcontractor invoice without apportioning for non-R&D work. Where a subcontractor worked on multiple projects, only the R&D-related portion can be included.
- Using identical percentages for all employees or all cost lines. Real teams don't all spend exactly the same proportion of their time on R&D. Uniform figures across the board look unrealistic to HMRC.
- Not keeping records of your methodology. Even if your figures are entirely reasonable, being unable to explain how you arrived at them is a significant problem during a compliance check.
Key takeaways
Getting your apportionments right is about building a methodology that is reasonable, consistent and explainable. HMRC expects estimates; what it doesn't accept is guesswork dressed up as analysis.
Whether you're apportioning staff time, subcontractor invoices, software licences or cloud spend, the same principles apply: identify what relates to qualifying R&D, apply a fair and defensible percentage, and keep records of how you reached your figures.
If you'd like help building an R&D cost apportionment that stands up to scrutiny, Tax Cloud is designed to guide you through every cost category, giving you the confidence to claim what you're genuinely entitled to. Get in touch with our friendly team to find out how we can help.
