Software development can qualify for UK R&D tax relief, but most app and SaaS work does not, and since April 2024 almost none of the qualifying work done by developers outside the UK counts. That second point catches founders out every week. A startup budgets a 20% credit on its build, hires an overseas team to stretch the money, and discovers at claim time that the overseas spend is excluded.
We are a software company, not tax advisers, and this is not tax advice. We write it because UK clients ask us the question before they sign, and the honest answer changes how they structure the build. It covers the merged R&D expenditure credit scheme and enhanced R&D intensive support (ERIS) for accounting periods beginning on or after 1 April 2024. It does not cover Northern Ireland's special ERIS rules in detail, ring-fenced trades, or claims for earlier periods.
Does software development qualify for R&D tax relief?
Software development qualifies for UK R&D tax relief when the project seeks an advance in science or technology by resolving a technological uncertainty a competent professional could not readily resolve. Routine app building, documented API integrations and screen design do not qualify on their own. New methods, or performance known techniques cannot reach, can.
HMRC's test has three parts: an advance in the overall field, not only in your company; genuine scientific or technological uncertainty; and a record of the work done to resolve it (GOV.UK: Check if you can claim R&D tax relief). The detail sits in the government's guidelines on the meaning of R&D for tax purposes.
| Usually qualifies (if the uncertainty is real) | Usually does not qualify |
|---|---|
| A new algorithm or model where it was unclear whether the approach could work | Building screens, forms and dashboards with standard frameworks |
| Achieving scale, latency or accuracy that known techniques could not deliver | Integrating payment, CRM or accounting APIs as documented |
| Making incompatible systems exchange data where no known method existed | Migrating to a new cloud provider using standard tooling |
| New approaches to security or data processing that experts could not readily deduce | Visual design, copy and user research on its own |
| Resolving uncertainty in how to apply machine learning to a new problem type | Calling a hosted AI model through its API in the intended way |
Most SaaS products contain a small R&D core inside a large amount of routine engineering. A good claim isolates that core and the time spent on it. A claim for "building our platform" is the kind HMRC challenges.
What the merged scheme and ERIS are worth
From accounting periods beginning on or after 1 April 2024, the merged scheme and ERIS replaced the old SME scheme and RDEC. The qualifying cost rules are the same for both. The calculation is different (HMRC merged scheme guidance).
| Merged scheme (RDEC) | ERIS | |
|---|---|---|
| Who | Trading companies chargeable to Corporation Tax | Loss-making SMEs whose relevant R&D spend is at least 30% of total expenditure |
| Rate | 20% expenditure credit, taxable as trading income | Extra 86% deduction (186% in total), plus a payable credit of up to 14.5% of the surrenderable loss |
| Rough value per £100 of qualifying cost | About £15 to £16.20 after tax, depending on your Corporation Tax rate | Up to about £27 for a loss-making company that surrenders the loss |
| Cap | Credit limited to £20,000 plus 300% of relevant PAYE and NIC liabilities, unless exempt | Payable credit subject to the same PAYE cap rules |
The ERIS figure works like this: £100 of qualifying cost creates an extra £86 deduction, so up to £186 of loss can be surrendered, and 14.5% of £186 is £26.97. The PAYE cap matters for startups with few UK employees, because a company with little UK payroll can find its credit limited regardless of how much it spent.
Which software development costs can you claim?
- Your own staff for time spent on the R&D: salaries, employer National Insurance, pension contributions and bonuses.
- Externally provided workers from a staff provider: 65% of the payment if unconnected, subject to the overseas rules below.
- Contractors you pay to do R&D you decided on: 65% of the relevant payment if unconnected, subject to the overseas rules below.
- Software licences used for the R&D, apportioned where partly used for other work.
- Cloud computing and data licence costs attributable to the R&D, for periods beginning on or after 1 April 2023.
- Consumables used up in the R&D, which for software companies is mostly power.
Costs must be paid before the claim is made, and only costs from the start to the end of the R&D activity count (HMRC: What R&D costs you can claim).
Outsourced development: who gets to claim?
Under the merged scheme, only the company that decides the R&D needs to be done can claim. If you commission a development agency and it is reasonable to assume you intended the R&D when you signed, you are the claimant and the agency is not (HMRC CIRD161000). For an unconnected contractor, 65% of the relevant portion of the payment is claimable (HMRC CIRD138000).
The practical consequence: your contract and statement of work should show that you set the technical objectives and the uncertainty to be resolved. If the paperwork suggests the agency decided on its own to attempt something novel, you weaken your claim.
The overseas rule: why offshore developer costs rarely qualify
This is the change that matters most for anyone using offshore or nearshore engineers. For both the merged scheme and ERIS, payments to externally provided workers whose earnings are not subject to UK PAYE, and payments to contractors for R&D carried out overseas, are excluded from qualifying expenditure (HMRC CIRD150500). "Overseas" means anywhere outside the UK, so an EU team is caught as well as an Asian one.
There is a narrow exception where conditions necessary for the R&D are not present in the UK, are present where the work is done, and would be wholly unreasonable to replicate here, such as geography, environment or a regulator's requirement. Two things are expressly disregarded: the cost of the R&D and the availability of workers (HMRC CIRD151100). HMRC's own examples include a company that could not recruit enough AI scientists in the UK and engaged overseas ones instead: the overseas costs do not qualify. A software business using overseas engineers because they understand local stock exchange rules is also described as unlikely to qualify.
A UK contract does not change this. If you sign with a UK company and the R&D work is performed by engineers abroad, the location of the activity is what counts. We apply that to ourselves: work our Islamabad team performs for UK clients should be treated as overseas for R&D purposes.
Does losing the relief make offshore development a bad deal?
Usually not, and it is worth doing the sum rather than guessing. Take a qualifying R&D workstream and price it two ways, using the merged scheme and a company paying Corporation Tax at 25%.
| UK contractor (unconnected) | Offshore team (UK contract, work abroad) | |
|---|---|---|
| Cost of the workstream | £100,000 | £45,000 |
| Qualifying expenditure | £65,000 (65%) | £0 |
| Merged scheme credit at 20% | £13,000 | £0 |
| Credit after 25% tax | £9,750 | £0 |
| Net cost | £90,250 | £45,000 |
The figures are illustrative; your own rates, tax position and any PAYE cap will change them. The pattern holds in most cases we see: relief narrows the price gap but does not close it. Where relief does change the answer is for loss-making, R&D-intensive companies under ERIS with UK payroll, and for companies whose investors expect a cash credit in the funding plan.
A structure many UK startups use is to keep the genuinely uncertain R&D work with UK employees or UK-based contractors, and give the well-defined product engineering around it to a lower-cost team, of the kind we compared in London vs offshore vs nearshore development. That keeps the claim clean and the build affordable. It needs a clear written split of work, which also makes the claim easier to evidence.
How to prepare a software R&D claim
- Check whether you must notify HMRC. If this is your first claim, or your last claim was more than three years before the end of the notification period, submit a claim notification form within six months of the end of the period of account. Miss it and the claim is invalid (HMRC claim notification guidance).
- Define the R&D projects. For each, write the baseline of knowledge, the advance sought and the specific technological uncertainties.
- Record time as you go. Tag tickets, branches or timesheets to R&D projects so staff time can be apportioned without guesswork.
- Separate UK and overseas activity. Invoices and statements of work should show where each piece of work was performed.
- Keep evidence of decisions. Design documents, failed experiments and technical reviews show the uncertainty and the work to resolve it.
- Submit the additional information form before the Company Tax Return claim, with project descriptions and cost breakdowns.
- Consider advance assurance if you are a smaller company claiming for the first time.
Good engineering practice and a good R&D claim overlap heavily. Written specifications, decision records and ticket history are the same artefacts we recommend in spec-driven development, and the same records investors ask for in technical due diligence.
Frequently asked questions
Can I claim R&D tax credits for software development?
Yes, if the project seeks an advance in science or technology by resolving a technological uncertainty that a competent professional could not readily resolve. Routine app and SaaS development using established tools does not qualify. Most products contain a smaller R&D core, and the claim should be limited to the time and costs spent on that core.
How much is the merged R&D scheme worth?
The merged scheme gives a 20% expenditure credit on qualifying costs. Because the credit is taxable, it is worth roughly 15% to 16.2% of qualifying spend after tax, depending on your Corporation Tax rate. Loss-making SMEs spending at least 30% of total expenditure on R&D can instead claim ERIS, worth up to about 27% of qualifying spend as a payable credit.
Can I claim R&D relief on offshore developers?
Generally no, for accounting periods beginning on or after 1 April 2024. Contractor payments for R&D carried out outside the UK, and externally provided workers not on UK PAYE, are excluded unless conditions necessary for the R&D exist only abroad. Lower cost and difficulty recruiting in the UK are specifically not accepted reasons.
Can a development agency claim R&D relief on my project?
Under the merged scheme, only the company that decides the R&D should be done can claim. If you commissioned the work intending the R&D, you are the claimant and the agency is not. The agency can claim only where it can show it decided on and planned R&D that you did not initiate or contemplate.
When do I need to submit a claim notification form?
If you are claiming for the first time, or your last claim was more than three years before the end of your claim notification period, you must submit the form within six months of the end of the period of account. Without it the claim is invalid.
Key takeaways
- Software qualifies only where there is genuine technological uncertainty; routine app and SaaS work does not.
- The merged scheme pays a taxable 20% credit, worth about 15% to 16.2% net; ERIS can be worth up to about 27% for loss-making R&D-intensive SMEs.
- Only the company that decides on the R&D can claim; unconnected contractor costs qualify at 65%.
- R&D performed outside the UK, including in the EU, is generally excluded, and a UK contract does not change that.
- Lost relief narrows the price gap with offshore teams but rarely closes it; run the numbers for your own case.
Plan the build and the claim together
If R&D relief is part of your funding plan, talk to us before you choose a delivery model. We contract through our UK company, work from our London office at 2-7 Clerkenwell Green, EC1R 0DE, and will map your scope into R&D and non-R&D workstreams with a written note on where each will be performed, so your adviser can price the claim properly. If keeping part of the work with a UK team makes more financial sense, we will show you the numbers. Our custom software development page explains how we structure builds.
Sources
- HMRC: The merged R&D expenditure credit scheme and ERIS (updated 8 January 2026)
- HMRC: Check what R&D costs you can claim
- HMRC Manual CIRD150500: Overseas restrictions overview
- HMRC Manual CIRD151100: Excluded conditions (cost and availability of workers)
- HMRC Manual CIRD161000: Contracted out R&D
- HMRC Manual CIRD138000: Contractor payments
- HMRC: Tell HMRC you plan to claim R&D tax relief
- GOV.UK: Guidelines on the meaning of R&D for tax purposes