R&D Tax Credits for Startups: What UK Software Companies Can Claim

Can Startups Claim R&D Tax Credits?

Yes. UK R&D tax relief is available to any UK corporation tax paying company, regardless of size, age, or revenue. You do not need to be profitable. In fact, loss-making companies often benefit the most because they can receive a cash credit from HMRC rather than just a reduction in their tax bill.

For accounting periods starting on or after 1 April 2024, the scheme that applies to most startups is the Enhanced R&D Intensive Support (ERIS) scheme (for R&D-intensive SMEs) or the merged RDEC scheme (for all other companies). Which one you fall under depends on whether your qualifying R&D expenditure makes up 30% or more of your total expenditure.

ERIS vs Merged RDEC: Which Applies to Your Startup?

If your R&D spend is 30% or more of your total costs, you qualify for ERIS. This gives R&D-intensive loss-making companies a payable credit of up to 27% of qualifying expenditure. Most early-stage software companies where the majority of spend is on developer salaries will meet this threshold.

If your R&D intensity is below 30%, you fall under the merged RDEC scheme. The credit rate is 20% of qualifying expenditure, taxable as income, giving an effective net benefit of around 15% for profitable companies or a payable credit for loss-makers.

What Counts as Qualifying R&D for a Software Startup?

HMRC defines R&D as work that seeks an advance in science or technology by resolving scientific or technological uncertainty. For software companies, this typically includes:

• Building novel algorithms, data processing pipelines, or architectures where the solution is not readily deducible by a competent professional
• Integrating systems in ways that have not been done before and where significant technical challenges had to be overcome
• Developing new approaches to performance, scalability, or security problems that go beyond applying known techniques
• Creating tools or frameworks that extend the state of the art in your technical domain

Routine software development, bug fixes, UI polish, and applying well-known patterns to standard problems do not qualify. The key test is whether a competent professional in the field would have faced genuine uncertainty about how to achieve the outcome.

What Costs Can You Include?

The main qualifying cost for software startups is staff costs: salaries, employer NICs, and pension contributions for developers, data scientists, and other technical staff working directly on qualifying R&D projects. You can also include:

• Cloud computing costs directly attributable to R&D (e.g. AWS/GCP/Azure spend for development and testing environments)
• Software licences used in the R&D process
• Subcontracted R&D to external developers or agencies (at 65% of the cost)
• Externally provided workers (contractors through agencies, at 65%)

You need to apportion costs if staff split their time between qualifying and non-qualifying work. Time tracking or a reasonable estimation method is essential.

How to Prepare Your First R&D Claim

1. Identify qualifying projects. Review your development work over the accounting period and pick out projects where you faced genuine technical uncertainty.
2. Document the technical narrative. For each project, write up what advance you sought, what uncertainties you encountered, and how you resolved them. HMRC now requires this via the Additional Information Form (AIF).
3. Calculate qualifying costs. Work out the staff time spent on each qualifying project and the associated salary costs, NICs, and pensions.
4. Get professional review. Have a qualified R&D tax adviser review your claim before submission. With 1 in 5 claims facing HMRC enquiry, professional sign-off is a sensible investment.

How CodeClaim Helps

CodeClaim automates the most time-consuming parts of this process. Connect your GitHub repository and we analyse your commit history to flag potential R&D activities, estimate time allocation, and draft technical narratives structured around HMRC's AIF requirements.

The output is a draft report your accountant or R&D adviser can review and refine, cutting weeks of preparation down to hours.