Introduction

Many startups assume that R&D tax credits only apply to deep-tech or scientific breakthroughs, but in reality, companies across various industries can claim tax relief for innovation. However, HMRC applies strict criteria to determine what qualifies as R&D, and failing to categorise your activities correctly could mean missing out on valuable tax credits—or worse, facing an HMRC inquiry.

Since 1 April 2024, the UK’s R&D tax credit system has undergone significant reforms. With the new Merged Scheme and Enhanced R&D Intensive Support (ERIS) Scheme, understanding what counts as R&D and which costs are eligible is more important than ever.

In this guide, we’ll cover:

• What HMRC defines as R&D and how to determine eligibility

• The difference between direct and supporting R&D activities

• The specific cost categories you can claim

• Common mistakes that could reduce or invalidate your claim

What Is Considered R&D Under the 2024 Rules?

HMRC defines R&D as work that seeks to make an advance in science or technology and resolve a technical uncertainty. This means the work must:

• Go beyond standard industry practice—solutions should not be readily available to professionals in the field.

• Involve **a process of experimentation, testing, and iteration** to solve technical or scientific uncertainties.

• Be aimed at **developing new or significantly improved products, processes, or services**.

• Result in either **a successful outcome or a failed attempt**—both are eligible for relief.

Key update: As of April 2024, R&D activities must **take place in the UK** to be eligible unless they meet strict exemption criteria (e.g., lack of UK resources).

Direct vs. Supporting R&D Activities

R&D tax relief applies to **both direct R&D activities and supporting activities**. Understanding the distinction is crucial to maximizing your claim.

Direct R&D Activities

These are activities that **directly contribute to solving technical challenges** and pushing innovation forward. Examples include:

• Developing **new or improved software, hardware, or manufacturing processes**.

• Conducting **scientific or technical research** to overcome technical uncertainties.

• Creating **prototypes and testing new materials or technologies**.

• Building **custom algorithms, AI models, or automation systems**.

Supporting R&D Activities

These are necessary activities that **enable or facilitate** direct R&D work. Examples include:

• **Project management and planning** directly related to R&D.

• **Data collection, analysis, and processing** used in R&D experiments.

• **Maintaining test environments, labs, or specialist software tools** for research.

• **Designing, modifying, or troubleshooting systems** to support R&D.

**Example:** If a startup is developing a **new AI-based fraud detection system**, writing and training the AI model counts as **direct R&D**, while collecting and structuring training data counts as **supporting R&D**.

Eligible Cost Categories Under the New R&D Scheme

HMRC allows companies to claim tax relief on **specific cost categories**. Understanding these categories is crucial to ensuring that you include all eligible expenses while avoiding non-qualifying costs.

1. Staff Costs

Salaries, employer NIC, and pensions for employees directly engaged in R&D.

• Researchers, software engineers, and developers working on R&D.

• Technical project managers involved in R&D planning and oversight.

Non-eligible: General admin, HR, marketing, and sales staff.

2. Externally Provided Workers (EPWs)

Payments to third-party workers engaged in R&D but **not on payroll** (e.g., agency staff).

3. Contracted Out R&D

If you subcontract R&D to another company, you can claim 65% of the costs if the work is performed in the UK.**

4. Software & Cloud Computing Costs

Costs related to software, cloud computing, and data licensing **used directly in R&D activities**.

5. Consumables

Materials used in the R&D process, such as:

• Prototyping components and raw materials.

• Chemicals, electronics, or specialized tools consumed during R&D.

6. Clinical Trials (For Life Sciences Companies)

Payments to volunteers participating in clinical trials **are eligible under the new scheme**.

Common R&D Claim Mistakes That Could Cost You

• **Claiming non-eligible costs** – Routine business activities like sales, marketing, and maintenance are not R&D.

• **Not documenting R&D work properly** – HMRC requires clear records of technical challenges and how they were solved.

• **Failing to separate R&D from routine work** – Only the portion of work contributing to an advance in technology is eligible.

• **Claiming overseas R&D without justification** – As of April 2024, R&D must take place in the UK unless strict criteria are met.

How Startup CFO Can Help

Many startups **underclaim or misclassify** R&D costs, leading to **missed funding opportunities or rejected claims**. At Startup CFO, we ensure your R&D tax credit claim is **fully optimized and HMRC-compliant**.

Our Services for Startups

• **R&D tax credit claim preparation** – Ensure you claim the maximum relief available.

• **Technical report drafting** – Avoid HMRC scrutiny with a structured and compliant report.

• **Compliance & audit support** – If HMRC challenges your claim, we handle the response.