Does your software project qualify for R&D tax relief? The 20% merged scheme and ERIS, worked examples, agency claims and the overseas rule.
Short answer. A UK company can claim R&D tax relief on software development if the project seeks an advance in science or technology and has to resolve technological uncertainty. Building an app or platform with established tools usually does not qualify; solving a problem a competent developer could not readily solve does. For accounting periods from 1 April 2024 the merged scheme gives a taxable credit of 20% of qualifying costs, about 15% net for a company paying 25% Corporation Tax; loss-making R&D-intensive SMEs can get up to about 27% of spend in cash under ERIS. If an agency builds it for you, you as the client normally claim, at 65% of the fees, and only if the work is done in the UK.
This guide is for founders and finance directors commissioning software. It explains the test, the two schemes with worked examples, what costs count, the rules on agencies and offshore teams, and the claim process, including the change announced in the 2026 Budget.
Last checked: 2 November 2026.
This is a general guide, not tax advice. Magora is a software developer, not a tax advisor. Confirm your position with your accountant or an R&D tax specialist, and check HMRC's current guidance before you claim.
Does your software project qualify?
The test comes from the government's guidelines on the meaning of R&D for tax purposes. A project qualifies when it seeks an advance in overall knowledge or capability in a field of science or technology, not just in your company, and the work directly contributes to resolving scientific or technological uncertainty.
| Likely to qualify | Unlikely to qualify |
|---|---|
| Developing a new algorithm or model where it is not known whether the required accuracy or speed is achievable | Building a booking, CRM or e-commerce system with standard frameworks |
| Making systems work together where no known method exists, for example real-time sync at a scale or latency not previously achieved | Integrating APIs that are documented and work as described |
| Novel data processing or security techniques that a competent professional could not readily deduce | Choosing, configuring or customising existing software |
| Creating software solely to support another qualifying R&D project | Design, content, UX and commercial work, however innovative for the market |
Based on the DSIT guidelines on the meaning of R&D for tax purposes, paragraphs 6–14, 22 and 27–28. A product can be new to the market without the development being R&D.
Only the parts of a project that address the uncertainty qualify, from the moment the uncertainty is identified until it is resolved. A typical commercial build might include a qualifying stream, such as a novel matching engine, inside a larger non-qualifying build. HMRC's online tool "Check if a project includes activities that qualify" gives its view, and the claim needs a competent professional to explain the advance.
The two schemes from April 2024
| Merged scheme (RDEC) | ERIS | |
|---|---|---|
| Who | Any trading company paying Corporation Tax | Loss-making SMEs where qualifying R&D is at least 30% of total expenditure |
| Benefit | Taxable credit of 20% of qualifying costs | Extra 86% deduction (186% in total) and a payable credit of up to 14.5% of the surrendered loss |
| Typical net value | About 15% of spend at 25% Corporation Tax; about 16.2% at 19% | Up to about 27% of spend in cash |
| Cap | Payable amount capped at £20,000 plus 300% of PAYE and NIC, unless exempt; excess carried forward | Same PAYE cap applies |
Source: GOV.UK, R&D tax relief: the merged scheme and enhanced R&D intensive support, updated 8 January 2026. Net values are our calculation from those rates, not HMRC examples.
Worked examples
These are illustrative calculations from the published rates. Your adviser will work out the real figures.
| Profitable company, merged scheme | Loss-making SME, ERIS | |
|---|---|---|
| Qualifying R&D costs | £100,000 | £100,000 |
| Calculation | £100,000 × 20% | £100,000 × 186% × 14.5% |
| Gross benefit | £20,000 credit | £26,970 payable credit |
| Tax on the credit (25% CT) | −£5,000 | Not taxable |
| Net benefit | £15,000 (15%) | £26,970 (about 27%) |
Assumes the loss is at least the enhanced amount and the PAYE cap is not reached. If you pay Corporation Tax at the 19% small profits rate, the merged-scheme net benefit is about 16.2%.
Which software costs count?
| Cost | How much counts |
|---|---|
| Your own staff (salaries, employer NIC, pension) | The share of time spent on qualifying R&D |
| Unconnected UK subcontractor or agency | 65% of the payment, where you are the company that decided on and planned the R&D |
| Externally provided workers (agency contractors) | 65% if unconnected; the lower of cost or payment if connected |
| Software licences used for R&D | The R&D share |
| Cloud computing and data licences | Qualify for accounting periods from 1 April 2023 |
| Work done outside the UK by contractors or external workers | Generally excluded from April 2024 |
| Capital spend, rent, patents, production costs | Not claimable |
Source: GOV.UK, check what R&D costs you can claim. Subcontractor costs must be paid before you claim.
If an agency builds your software, who claims?
For accounting periods from 1 April 2024, only the company that decides the R&D should be done can claim. A contractor can claim only if it can show it made that decision and planned the R&D without the customer initiating it. In a normal client-agency relationship the client claims for its own R&D, and an unconnected agency's fees count at 65%.
Three practical consequences:
- Keep the evidence. Record the uncertainties, the approaches tried and why, in your own name. The agency's tickets and technical notes help, so ask for them.
- Write the contract clearly. State that you decide and direct the R&D and that the work is carried out in the UK.
- Separate the qualifying stream. Agree with the agency which parts of the work address the uncertainty, so costs can be apportioned honestly.
Offshore and nearshore teams: the overseas restriction
From April 2024, payments to contractors and externally provided workers for R&D done outside the UK generally do not qualify. That includes EU nearshore teams. The exception applies only where conditions needed for the R&D, such as geographical, environmental, legal or regulatory ones, are not present in the UK. HMRC's guidance states that the cost of the R&D and the availability of workers do not count, and gives software examples that fail for those reasons.
So when you compare a UK quote with an overseas one for R&D-heavy work, include the relief: a UK agency's fees can bring back about 10% of the cost after tax under the merged scheme (65% × 15%), while the overseas fees bring back nothing. See nearshore vs offshore vs UK software development.
Pick your features in our calculator for a ballpark, or send us your brief for a free estimate. Developers from £49/hour; a full team with QA and product ownership £65–£70/hour.
How to claim: deadlines and forms
- Claim notification (first-time claimants). Submit within 6 months of the end of the period of account if you have not claimed in the previous 3 years; otherwise the claim is invalid. The 2026 Budget announced that this requirement will be removed for claims made from 1 April 2027.
- Additional Information Form. Required for every claim and submitted before or on the same day as the Company Tax Return. The government plans to simplify it from autumn 2027.
- Company Tax Return. Claim on the CT600 with the CT600L supplementary pages.
- Time limit. Generally 24 months from the end of the period of account.
HMRC offers advance assurance for first-time SME claimants, and since May 2026 a targeted advance assurance pilot, running until May 2027, where SMEs can get HMRC's view on up to two specific areas, such as whether a project is R&D, whether overseas costs qualify, or who can claim when work is contracted between companies.
HMRC estimates error and fraud in R&D claims for 2023-24 at 6.4% overall and 11.1% in the old SME scheme, so expect questions. Claims that separate the qualifying work clearly and are backed by technical records fare best.
Plan R&D into your software project
- Identify the uncertainty in Discovery. If there is a real technical unknown, a time-boxed proof of concept is the cleanest way to define it and record how it was resolved. See our AI proof of concept service for AI projects.
- Document as you go: hypotheses, experiments, results and dead ends, with dates.
- Keep the work in the UK if relief is part of your business case.
- Talk to an adviser before the period ends, not after the accounts are filed.
Magora is a UK company with its own in-house team in London, so the work we do for clients is carried out in the UK. We do not advise on tax or prepare claims, but we provide the technical records your adviser needs. Our published prices: Discovery from £3,000, a first release from £10,000 in 6–8 weeks, a full production system £25,000–£60,000, developers from £49 an hour. See UK software development pricing.
Planning a technically ambitious product? Send us a brief: we will build a free working prototype in 5–10 working days and, in Discovery, separate the genuinely uncertain parts from the routine build. More about our bespoke software development.
Frequently asked questions
Can you claim R&D tax credits for software development?
Yes, if the project seeks an advance in science or technology by resolving technological uncertainty that a competent professional could not readily resolve. Ordinary app or web builds using established tools usually do not qualify, even if the product is new to the market.
What is the R&D tax credit rate in 2026?
For accounting periods from 1 April 2024, the merged scheme gives a taxable credit of 20% of qualifying expenditure, worth about 15% net to a company paying 25% Corporation Tax. Loss-making R&D-intensive SMEs, where qualifying R&D is at least 30% of total spend, can use ERIS: a 186% deduction and a payable credit of up to 14.5% of the surrendered loss.
Who claims when a software agency builds the product?
Under the rules for periods from 1 April 2024, the company that decides the R&D should be done and plans it claims, which is normally the client, not the agency. Payments to an unconnected UK subcontractor count at 65%.
Can I claim for an offshore or nearshore development team?
Generally not. Payments to contractors and externally provided workers for R&D carried out outside the UK are excluded, unless conditions needed for the R&D do not exist in the UK. Cost and availability of workers are not accepted reasons.
Do cloud computing costs qualify?
Yes, for accounting periods beginning on or after 1 April 2023: cloud computing and data licence costs used directly in R&D can qualify.
What is the deadline for an R&D claim?
Generally 24 months from the end of the period of account. First-time claimants must also submit a claim notification within 6 months of the period end, and every claim needs an Additional Information Form. The government plans to remove the claim notification requirement for claims made from 1 April 2027.
Sources
- GOV.UK: R&D tax relief, the merged scheme and ERIS
- GOV.UK: guidelines on the meaning of R&D for tax purposes
- GOV.UK: check what R&D costs you can claim
- HMRC CIRD150500: overseas restriction
- GOV.UK: tell HMRC you are planning to claim (claim notification)
- GOV.UK: Additional Information Form
- GOV.UK: make a claim on your Company Tax Return
- GOV.UK: R&D tax relief advance assurance
- GOV.UK: R&D tax reliefs, improving the customer experience (Budget 2026)
- HMRC annual report and accounts 2025 to 2026
Pavel Shevtsov
Pavel Shevtsov is a seasoned professional in the field of software development, currently serving as the Managing Director at Magora, a leading software development company known for its innovative solutions. With a passion for leveraging technology to solve complex business challenges, Pavel has played a pivotal role in Magora's growth and success.
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