How UK Deeptech and Biotech Startups Claim R&D Tax Credit for Prototypes

For a UK-based Deeptech or Biotech startup, the prototype phase is where capital-intensive risks and game-changing breakthroughs collide. Understanding how to claim R&D tax credit for prototypes in the UK is not just an accounting task; it is a strategic tool for extending your runway. Whether fabricating a new medical device or deploying a novel algorithm, the associated costs are significant. The core challenge for founders is confidently navigating HMRC's requirements to build a robust claim that stands up to scrutiny, especially without a dedicated finance team.

Understanding the Foundation: Technological Uncertainty

The entire UK R&D tax relief scheme is built on a single, powerful concept. According to official guidelines, the incentive supports companies "seeking an advance in science or technology by resolving a 'technological uncertainty'." (HMRC R&D scheme). This is the golden rule that underpins every successful claim.

It is essential to distinguish this from market uncertainty. Market uncertainty asks, “Will customers buy our product?” In contrast, technological uncertainty asks, “Can we achieve this performance, or is it even possible with the current state of scientific knowledge?” Your process for claiming R&D tax relief for prototypes must centre on proving you were resolving the latter.

For instance, building a standard e-commerce app using established frameworks involves market uncertainty, not technological uncertainty. However, developing a new algorithm to predict protein folding with unprecedented accuracy for a Biotech platform is steeped in technological uncertainty. HMRC wants to see evidence that you were attempting to overcome a genuine scientific challenge where the outcome was not readily deducible by a competent professional in the field.

How to Claim R&D Tax Credit for Eligible Prototype Costs in the UK

One of the most common pitfalls for startups is either over-claiming for routine business costs or, more often, under-claiming by missing eligible prototype development expenses. A clear framework of 'what's in versus what's out' is vital. In practice, we see that a proportional approach, where you allocate a percentage of a cost to R&D, is often the key to an accurate claim.

People Costs

This is typically the largest component of any R&D claim. The goal is to isolate the time your team spent directly resolving the defined technological uncertainty.

• What’s In: According to the scheme, this includes "Eligible People Costs: Gross salary, employer's NI, and pension contributions for staff directly working on or supervising the R&D project." For example, if your lead scientist spends 70% of her time experimenting on a new compound, you can claim 70% of her qualifying employment costs.
• What’s Out: The rules exclude "Ineligible People Costs: Time spent on commercial activities (market research, sales demos), routine maintenance, general administration, recruiter fees, or dividends." Time the same scientist spends in a sales meeting does not qualify.

Digital Prototypes and Software Costs

Consider a SaaS startup developing a new recommendation engine. The technological uncertainty is whether their novel machine learning model can process user data in real-time to deliver relevant suggestions with 99% accuracy, something not achievable with off-the-shelf libraries.

• What’s In: The claim can include "Eligible Software & Digital Consumables: Software licenses essential for R&D (e.g., CAD software), a portion of cloud computing costs (e.g., AWS, Azure) for development and testing environments." The costs for the AWS servers used specifically to train and test the new algorithm are eligible.
• What’s Out: You cannot claim for "Ineligible Software & Digital Consumables: Hosting for commercial/live applications, general business software (e.g., Microsoft 365, Slack, accounting software)." The cost of hosting your live application on AWS or your company's Xero subscription is not R&D.

Physical Prototypes and Materials

Let's take a Deeptech example: a startup building a new drone chassis from a novel composite material. The technological uncertainty is whether the material can withstand operational stresses without delaminating. The direct costs of building and testing are part of your eligible prototype costs.

• What’s In: This includes "Eligible Physical Materials & Consumables: Raw materials, lab chemicals, components, and parts used to build a physical prototype; utilities consumed during the R&D process." The resin, carbon fibre, and energy used to cure the prototype are all qualifying expenses. For specific Deeptech guidance, see UK R&D Tax Credits for Deeptech Companies.
• What’s Out: Be careful not to conflate prototyping with production. The scheme excludes "Ineligible Physical Materials & Consumables: Materials for a commercial production run; rent or property costs are typically not claimable under the SME scheme."

Meeting R&D Tax Documentation Requirements Without Creating Bureaucracy

For an early-stage startup, the phrase 'documentation requirements' can trigger fears of time-consuming red tape. The reality is more pragmatic. HMRC wants to see contemporaneous evidence, meaning records created as the R&D happens, not a perfect report written a year later. A practical guide to the Additional Information Form and building supporting evidence for R&D claims is available from professional advisors like PwC. The key is to leverage the tools you already use daily.

You can meet your R&D tax documentation requirements by transforming operational tools into an evidence repository. What founders find actually works is embedding simple habits into their existing workflow.

• Project Management (Jira/Asana): This is your best friend for creating prototype project records. Create a specific project for your R&D initiative. Each ticket should describe the hypothesis being tested, such as: “Test new composite curing process to increase tensile strength by 15%.” The comments on these tickets form a living log of your progress, including failures and iterations. Practical time-tracking approaches are detailed in the guide on UK R&D Tax Credit Time Tracking.
• Version Control (Git): Your commit messages are a technical diary. Encourage engineers to write descriptive messages explaining the ‘why’ behind a code change, linking them to a Jira ticket. This creates an auditable trail connecting technical effort directly to the R&D goals. See examples for documenting software work in the Qualifying R&D Activities: UK SaaS Examples guide.
• Brief Technical Narratives: You do not need to write a thesis. A simple one-page document at the start of a project can outline the baseline technology, the advance you are seeking, and the specific uncertainties. A similar document at the end can summarise the outcomes. This provides crucial context for the records in Jira and Git. If this is your first attempt, the First-Time R&D Credit Claim checklist is a helpful template.

For a Seed-stage biotech, a well-maintained Jira board and lab notebook are often sufficient. A Series B company might add quarterly project summaries. The goal is not bureaucracy, but a clear, consistent story of your innovation.

Aligning Engineering and Finance for a Frictionless HMRC R&D Claim Process

This is where many R&D claims fall apart. Engineers are focused on solving complex problems and view tracking time as a distraction. The founder, often acting as the de-facto finance lead, needs accurate data. This inherent friction can sabotage the entire process.

The pattern across successful Deeptech and Biotech startups is consistent: the most effective systems integrate into existing engineering workflows rather than imposing new administrative burdens. Here is a practical, low-friction process:

1. Embrace Tagging, Not Timesheets: The biggest win is to replace timesheets with tags. Engineers already use tools like Jira. Create a specific tag, such as “R&D-Eligible,” and train the team to apply it to any task related to resolving a technological uncertainty. This takes seconds and doesn't disrupt their flow. This approach is explained further in our guide to UK R&D Tax Credit Time Tracking.
2. Hold a Monthly R&D Sync: At the end of each month, the technical lead and the finance lead should have a 30-minute meeting. They can filter the project board by the “R&D-Eligible” tag to review completed work and collaboratively estimate the percentage of each team member's time spent on those activities.
3. Log It in Your Finance System: Apply this percentage to the employee's qualifying costs from your payroll report in a system like Xero. This calculation can be maintained in a simple spreadsheet. For direct costs, when an engineer purchases materials or software for the project, they can flag it in a Slack channel. The finance person can then tag that transaction in Xero for the R&D claim.

This approach builds a contemporaneous record of eligible costs without forcing engineers into a rigid time-tracking system they will resent.

Actionable Steps for a Successful Prototype Claim

Successfully navigating the HMRC R&D claim process for prototypes requires a pragmatic and consistent approach that is embedded into your existing operational rhythm. To improve how you claim R&D tax credit for prototypes in the UK, focus on these four actions:

1. Define the Uncertainty First: Before writing code or ordering materials, create a simple statement defining the specific technological or scientific uncertainty you are trying to resolve. This is the foundation of your entire claim.
2. Use Tags, Not Timesheets: Integrate R&D tracking into the tools your technical team already uses. A simple “R&D” tag in Jira or Asana is far more effective and sustainable than a burdensome timesheet system.
3. Isolate Costs as They Occur: Use your accounting software to tag R&D-specific invoices for materials, consumables, and software as soon as they are paid. Do not wait until year-end to try and remember which AWS bill was for R&D versus production.
4. Tell a Coherent Story: Your documentation, from Jira tickets to project summaries, should collectively tell a clear story. It must answer: What was the technological baseline? What advance did you seek? What challenges did you face, and how did you overcome them?

For a complete hub on preparing and supporting R&D claims, see our broader R&D Tax Credit Process & Documentation resources.

Frequently Asked Questions

Q: Can we claim R&D tax relief for a prototype that ultimately failed?
A: Yes, absolutely. The UK R&D scheme is designed to incentivise risk-taking. A failed project is often powerful supporting evidence for R&D claims, as it demonstrates you were tackling a genuine technological uncertainty where the outcome was not guaranteed. Documenting your failures is as important as documenting your successes.

Q: What is the most common mistake startups make with prototype development expenses?
A: The most frequent error is either under-claiming by missing eligible costs like a portion of cloud computing or specific consumables, or over-claiming by including routine operational expenses. A close second is failing to create contemporaneous records, which makes it difficult to justify the claim to HMRC later.

Q: Can I claim for a prototype that is later sold to a customer?
A: Yes, but the rules are specific. If the prototype is sold as part of your company's ordinary course of business, the cost of materials used to produce it cannot be claimed under the SME scheme. However, the associated staff, software, and consumable costs for the R&D phase may still qualify.