How to claim UK R&D tax credits for Deeptech startups: practical steps

UK R&D Tax Credits for Deeptech Companies

For deeptech founders, the runway is everything. Your R&D spend is necessarily high, and every pound of investment is scrutinised for its impact on hitting the next technical milestone. In this high-stakes environment, overlooking UK R&D tax credits is like leaving non-dilutive cash on the table. But the scheme is often misunderstood by the very companies it is designed to help.

The core challenge for founders is not just filing the forms; it is translating groundbreaking technical work into the specific language HMRC requires. This guide provides a practical framework for how to claim R&D tax credits for deeptech startups uk. It is designed for leaders without a dedicated finance team who need clear, actionable steps to secure this vital source of funding and extend their operational runway.

Foundational Understanding: Is It Commercial Innovation or HMRC-Defined R&D?

The single biggest point of failure in R&D claims is misunderstanding the difference between commercial innovation and qualifying Research & Development. While your product may be revolutionary in the market, HMRC is not assessing its commercial viability or novelty. Its definition is far more specific and technical, hinging on two core concepts.

To qualify, a project must be 'seeking an advance in science or technology' by resolving 'scientific or technological uncertainty'. This means the focus is on the *process*, not just the outcome. You must demonstrate that your team attempted to overcome challenges that a competent professional in the field could not easily solve using existing knowledge. This foundational HMRC R&D guidance is crucial for accessing technology project tax benefits.

For example, creating a new mobile app using standard programming libraries and established architectural patterns is commercial innovation. In contrast, developing a novel algorithm to fundamentally improve data compression for real-time video streaming is R&D. Understanding this distinction is the first and most important step in building a successful claim.

How to Know if Your AI or Robotics Project Qualifies: The Litmus Test

To determine if your work qualifies, you must answer two questions from HMRC's perspective. First, what was the established technological baseline when you started? Second, what specific uncertainties did you have to overcome to advance beyond it? For most deeptech startups, the qualifying work is often buried in the core technical challenges, not the shiny, user-facing features.

Consider these contrasting examples which are relevant for AI research funding UK and robotics development tax incentives.

Qualifying AI and Machine Learning Projects

• Scenario: Developing a proprietary neural network architecture that reduces computational overhead by 50% for on-device natural language processing. This makes complex AI feasible on low-power hardware for the first time.
• Why it qualifies: The project sought to resolve a fundamental technological uncertainty around processing efficiency and model architecture. It aimed to create a new capability that was not achievable with existing, publicly available methods. The work went beyond simply applying known models.

Non-Qualifying AI and Machine Learning Projects

• Scenario: Using an established, open-source model like GPT-3 via an API to build a new marketing copywriting tool.
• Why it does not qualify: This involves the application of existing technology to a new commercial use case. It does not resolve any underlying technological uncertainty in the field of AI itself. This is routine engineering.

Qualifying Robotics Projects

• Scenario: Creating a novel pathfinding algorithm and sensor fusion system that enables an autonomous robot to navigate a cluttered, dynamic warehouse environment with 99.9% reliability, far exceeding existing industry benchmarks.
• Why it qualifies: This work pushed beyond the known limits of robotic navigation. It involved resolving significant uncertainties in real-time decision-making, environmental interpretation, and data fusion from multiple, disparate sensors.

Non-Qualifying Robotics Projects

• Scenario: Assembling a robotic arm from off-the-shelf components to automate a simple pick-and-place task on a predictable, static assembly line.
• Why it does not qualify: This is a classic case of systems integration using established methods and predictable components. The outcome is known from the start, and there are no significant technological uncertainties to overcome.

How Much Can Deeptech Startups Actually Claim?

The actual cash benefit your startup receives depends on its size, profitability, and which scheme you qualify for. For most pre-seed to Series B deeptech companies in the UK, the SME Scheme is the most relevant and generous route. However, it is essential to understand both options.

The SME Scheme

This is the primary route for most startups. It is particularly generous for companies that are not yet profitable, which is common in the capital-intensive world of deeptech. For loss-making companies, the benefit is delivered as a direct cash payment from HMRC, providing a vital injection of non-dilutive funding.

Under the latest regulations, "For loss-making companies, the SME Scheme provides a payable tax credit of up to 14.5% on qualifying expenditure." This applies from 1 April 2024. For historical context, it is also worth noting that "For expenditure before 1 April 2024, the credit for R&D-intensive SMEs was up to 18.6%."

The Merged Scheme (formerly RDEC)

The Research and Development Expenditure Credit (RDEC) is now part of a merged scheme that generally applies to larger companies. However, a startup might find itself using this scheme under specific circumstances. For instance, if you have received certain types of grants that are classed as notified state aid, or if you are subcontracted to perform R&D by a large company, you may need to claim through this route.

The benefit is calculated differently but remains significant. "The Merged Scheme (formerly RDEC) provides a net cash benefit of around 15%." This is an 'above-the-line' credit, which means it appears as income in your accounts rather than a reduction in your tax bill. This can be beneficial for showing profitability to potential investors.

Assembling Your Claim: What Costs Can Be Included?

Once you have identified your qualifying R&D projects, the next step is accurately calculating the associated costs. Getting this right is key to maximising your benefit and correctly claiming R&D expenses UK. HMRC allows claims on three primary categories of expenditure.

1. Staff Costs

This is typically the largest part of any deeptech R&D claim. It includes the gross salaries, employer's National Insurance contributions, and employer pension contributions for employees directly and actively engaged in the R&D activities. The main challenge here is apportionment.

An engineer might spend 70% of their time on a qualifying R&D project and 30% on routine maintenance or customer support. You can only claim for the 70% of their costs related to R&D. For founders using spreadsheets and Xero, a simple but consistent tracking system is essential. Consider a sheet with columns for Employee Name, Role, Monthly Gross Salary, R&D Project(s) Worked On, and Percentage of Time on R&D. This creates a clear audit trail.

2. Subcontractors and Externally Provided Workers (EPWs)

If you use external specialists to help resolve your technological uncertainties, these costs can often be included, but the rules are complex. A key restriction is that "Costs for subcontractors or Externally Provided Workers (EPWs) are often capped at 65% of the cost for claim purposes."

A common pitfall lies in the contractual agreement. Your statement of work should clearly outline the technological uncertainty the subcontractor was hired to help resolve. If it reads like a contract for a fixed deliverable without reference to the R&D process, HMRC may disallow the cost. For more on this, see guidance on outsourcing vs in-house R&D work.

3. Consumables and Software

This category includes the cost of materials and utilities, such as water, fuel, and power, that are used up or transformed during the R&D process. For a robotics company, this could include materials for building and testing prototypes. For an AI company, this increasingly includes the cloud computing costs for model training on platforms like AWS or Google Cloud, as well as data licensing costs.

It is important to note that this category does not include capital expenditure or general overheads like rent or administrative staff costs.

Avoiding HMRC Enquiries: Writing a Compelling Technical Narrative

The financial calculation is only half the battle. Your claim must be supported by a compelling technical narrative that explains to HMRC *why* your projects qualify as R&D. This document is your primary opportunity to justify your claim to an inspector. A scenario we repeatedly see is technically brilliant companies failing at this stage because their narrative is unclear, too brief, or focuses on commercial goals instead of technical hurdles.

Your narrative should be structured as a story that directly answers HMRC's key questions. Follow this five-step process for each project you claim for:

1. Project Overview: Start by briefly describing the project's overall commercial aims. This sets the context for the technical work that follows.
2. Baseline Technology: Describe the state of scientific or technological knowledge in the field before you began. Why could you not simply buy an off-the-shelf solution or use a standard industry practice to achieve your goals?
3. Technological Advance: Clearly state the specific, measurable advance you were trying to achieve over that baseline. Be precise. Instead of "we built a better AI," write "we aimed to create a novel transformer architecture that could process sequential data with 30% less latency than existing state-of-the-art models."
4. Technological Uncertainties: This is the most crucial section. List the specific technical challenges you faced that a competent professional could not readily solve. What were the scientific or engineering unknowns that stood between the baseline and your intended advance?
5. R&D Activities: Finally, detail the work your team performed to overcome those uncertainties. Describe the systematic process of experimentation, prototyping, testing, and analysis that took place. This shows HMRC you followed a scientific method.

Write for an intelligent but non-expert audience. The inspector reviewing your claim is a competent professional but not necessarily a specialist in your niche. Clarity is more important than jargon. Your goal is to make it easy for them to understand the technical challenge and approve your claim.

Practical Steps for a Successful Claim

For deeptech founders, successfully navigating the R&D tax credit scheme is a matter of process and documentation. It does not require a large finance team, but it does require foresight and discipline throughout the year.

• Start Tracking Now: Do not wait until your financial year-end to try and piece everything together. Implement a simple system today, whether it is a spreadsheet for time allocation, project tags in your accounting software like Xero for R&D-specific expenses, or notes in your project management tools. The effort now will save immense headaches later.
• Document As You Go: Keep contemporaneous records of technical challenges and progress. Meeting notes, internal wikis, code repository comments, or even dated documents detailing failed experiments can become powerful evidence to support your technical narrative. Remember, failed R&D is still R&D.
• Review Your Contracts: When engaging subcontractors for R&D work, ensure the scope of work reflects the exploratory nature of the project. The contract should focus on the resolution of technological uncertainty, not just the delivery of a final product on a fixed timeline.
• Focus on the 'Why': This is the most important mindset shift. The most common mistake is describing what you built. Instead, focus your claim on *why* it was hard to build and what technological uncertainties you had to overcome along the way. That is what HMRC truly cares about.

Following these steps is the most effective way to learn how to claim R&D tax credits for deeptech startups uk and unlock a vital source of deeptech innovation tax relief.

Frequently Asked Questions

Q: Can we claim for R&D projects that ultimately failed?
A: Yes, absolutely. The scheme focuses on the R&D process, not the outcome. A project that sought to overcome technological uncertainty but failed is still eligible. In fact, documenting failed experiments can provide strong evidence that genuine R&D was taking place, as the outcome was uncertain from the start.

Q: How far back can our startup make a claim for R&D tax credits?
A: A company can claim R&D tax relief for its last two completed accounting periods. This means you must submit your claim within two years of the end of the accounting period in which the R&D expenditure was incurred. This makes it critical to stay on top of your filing deadlines.

Q: Does developing new software always qualify for deeptech innovation tax relief?
A: No. Creating software using known methods, standard architectures, or existing libraries does not qualify. The R&D must be aimed at creating a technological advance in the field of computer science itself, such as developing a new algorithm, a novel database structure, or a fundamentally new way of processing data.