Companies claiming R&D tax credits can very easily overestimate their eligible costs and activities. The qualifying criteria don't just apply to the project as a whole; they apply to specific activities, specific costs, and specific periods of work within that project.
Getting this wrong can prompt an HMRC compliance check, so knowing the common pitfalls is crucial before you submit your claim.
Does your project actually qualify?
No costs qualify unless the underlying project does. R&D tax credits are designed to reward genuine scientific or technological advance under conditions of uncertainty. If your project is focused on a commercial challenge (entering a new market, redesigning a product for cost reasons, or meeting a customer's specification) rather than resolving a technological uncertainty, it won't qualify.
The test isn't whether the work was difficult or expensive. It's whether a competent professional in that field could have solved the problem using existing knowledge. If the answer is yes, there's no qualifying uncertainty, and the project falls outside the scheme.
Many real R&D projects contain both qualifying and non-qualifying work. The fact that part of your project doesn't qualify doesn't disqualify the whole thing, but you need to be precise about what you're claiming for. Similarly, part of your project qualifying doesn’t mean that all the work you do qualifies.
Activities that don't directly contribute to the R&D
Even within a qualifying project, not every activity counts as R&D. HMRC distinguishes between activities that directly contribute to the R&D and everything else.
Directly contributing activities, such as designing experiments, writing qualifying code, testing, and technical analysis, are claimable. Qualifying indirect activities (QIAs) offer companies the chance to claim for some of the indispensable work that’s needed for R&D to happen, but isn’t directly contributing to the R&D. This includes administrative tasks, equipment maintenance and training, among other things; this list is finite though.
Non-qualifying indirect activities are a common trap. These are activities that benefit the R&D project indirectly but don't meet HMRC's criteria for inclusion. General IT support, HR, finance, and standard business operations typically fall into this category. Misclassifying indirect activities as qualifying R&D activity is one of the more common errors we see.
Work that falls outside the period of uncertainty
The R&D window begins when you first identify a technological uncertainty and ends when that uncertainty is resolved (or you establish it can't be resolved). Costs that fall outside that window don't qualify.
In practice, this means work done before the problem is properly defined, and work done after the solution has been confirmed, won't sit within the qualifying period. If you're commercialising a product or scaling up production after a successful R&D phase, those costs belong elsewhere in your accounts, even if the work is technically complex.
This boundary matters more than most claimants realise. It's critical to apportion your costs carefully rather than treating the whole project timeline as qualifying.
Overseas R&D activity
Since April 2024, R&D tax credits under the Merged Scheme are restricted to work carried out in the United Kingdom. Costs for R&D activity performed overseas are not eligible, with very limited exceptions for work that is geographically constrained (such as environmental testing that must happen in a specific location) or where the necessary expertise genuinely doesn't exist in the UK.
This is one of the more significant changes from recent HMRC reform, and it affects businesses that rely on overseas contractors or have distributed development teams. You can read more about how overseas costs are treated under the current rules.
Subcontractors that don't meet the qualifying conditions
Subcontractor costs are claimable in some circumstances, but the rules are specific. Under the Merged Scheme, you can claim for UK-based externally provided workers (EPWs) and subcontractors. If your subcontractor is connected to your company, only 65% of the cost is claimable. If they're unconnected, you can claim the full qualifying cost.
What doesn't qualify: subcontractors carrying out non-R&D work, overseas subcontractors outside the limited geographic exceptions, and arrangements where the claimant is contested. Under the old RDEC scheme (for accounting periods beginning before 1 April 2024), large companies could not claim for subcontractors; this has now changed under the Merged Scheme.
Now, it’s important to define which party can claim by assessing who “intended or contemplated” the R&D. If your contractor carries out R&D on your behalf, but you clearly communicated this in their responsibilities before they began the work, this is yours to claim. However, if a contractor carries out R&D to be able to deliver their services and the contracting party did not intend for them to do this R&D, that work can be part of the contractor’s claim. The rules around subcontractors and EPWs are worth reviewing carefully before you finalise this part of your claim.
Plant and machinery costs
Capital expenditure on plant and machinery is not an eligible cost for R&D tax credits. This includes equipment, laboratory hardware, machinery, and other physical assets, even when those assets are used exclusively for R&D.
The eligible cost categories cover staff costs, consumables, software, subcontractors and EPWs, and payments to clinical trial volunteers. Plant and machinery sits outside all of them. You may be able to claim capital allowances on these assets through a separate route, but they won't feature in your R&D tax credit claim.
Key takeaways
- Your project must demonstrate genuine scientific or technological uncertainty. Commercial challenges, customer requirements, or cost-reduction goals don't qualify on their own.
- Not every activity within a qualifying project counts. Only directly contributing R&D activities and certain qualifying indirect activities are eligible.
- The qualifying period is bounded by uncertainty. Work before the problem is defined, and after it's resolved, falls outside the claim.
- R&D must be UK-based. Overseas costs are excluded except in narrow, evidenced circumstances.
- Subcontractor rules are specific. Connected and unconnected contractors are treated differently, overseas subcontractors are generally excluded, and you must be clear about who “intended or contemplated” the R&D work.
- Plant and machinery isn't claimable through this route. Even if used entirely for R&D.
Getting these boundaries right before you calculate your claim reduces the risk of HMRC querying your submission, and makes for a more robust claim overall.
If you'd like help identifying what qualifies in your specific project, get in touch and we'll walk you through it.
