If you are heading into a December year end and planning an R&D claim, you are not alone. The rules have shifted, HMRC scrutiny has tightened, and AI teams in particular are being asked to evidence real technical uncertainty, not just smart implementation. This guide walks you through who qualifies, what costs count, how the merged scheme affects SMEs, what HMRC look for, and how to build a robust claim that supports your cash runway and investor story.

Who qualifies and which costs are eligible?

The core test has not changed. You can claim if you are trying to achieve an advance in science or technology, facing technical uncertainty that a competent professional could not readily resolve, and you are using a systematic process of design, testing and iteration. For AI and software teams, that often means pushing beyond known methods, not simply wiring together known components or using off the shelf APIs as intended.

Eligible activities typically include:
  • Defining and testing new algorithms or model architectures.
  • Overcoming scaling limits, latency, memory constraints or numerical stability issues that do not have known solutions.
  • Data engineering work that is inseparable from the experimental R&D, such as building pipelines to test new approaches, or labelling at the level required for novel model performance.
  • Integrating hardware and software in ways that require research into performance characteristics, for example embedded or edge AI.
Eligible costs often include:
  • Staff costs for employees directly engaged in qualifying R&D, including salaries, employer NIC and employer pension.
  • Externally provided workers through qualifying staff providers, subject to rules and caps.
  • Subcontracted R&D, subject to who is the principal and scheme rules.
  • Consumables used up in the R&D process, such as cloud compute, storage used for experimentation that is consumed, and prototype components.
  • Some software costs used directly for the R&D activity.

Non-qualifying costs include routine production hosting, general data warehousing for commercial operations, cosmetic UI, business-as-usual bug fixing, and costs that are capital in nature unless they meet specific software or prototype criteria.

What changed for 2025, and what triggers enquiries?

The government is merging the SME scheme and RDEC into a single framework for most companies, with an enhanced rate for R&D intensive SMEs. The direction of travel is consistent: tighter definitions, more disclosure, and stronger compliance checks.

Key practical changes and reminders to plan for:
  • Claim notification: many first-time claimants, and some returning claimants, must notify HMRC within six months of the end of the period. Missing this deadline can block your claim.
  • Additional information form: you must submit detailed technical and financial information alongside the return. This is now a standard step.
  • Subcontracting and EPWs: HMRC are checking who directed and bore the risk of the R&D. Paperwork and reality need to match.
  • Overseas costs: overseas subcontractors and EPWs are more restricted. Check territoriality rules early to avoid surprises.
  • Compliance history: error-prone or inflated claims are receiving enquiries. HMRC uses data signals such as sudden jumps in claim size, boilerplate narratives, and vague descriptions of uncertainty.
Common enquiry triggers we see:
  • Vague or marketing language without specific uncertainties or failure paths.
  • Claims that look like routine software development or systems integration.
  • Minimal time records for a large staff cost allocation.
  • Subcontractor invoices that say software development with no reference to R&D scope.
  • Compute bills with no tie back to experiments, environments, or runs.

Subcontractor rules in plain English

If you subcontract R&D, eligibility depends on the scheme and on who is the principal. Document the scope: who sets the hypotheses, owns the approach, accepts technical risk, and decides when work is complete. For AI teams, include statements of the target advance, evaluation metrics, and why alternatives were not viable. Keep statements of work, sprint goals, and acceptance notes. If you are the subcontractor, your eligibility depends on the customer’s status and scheme, so get clarity before pricing.

How to collect evidence all year

A strong claim is built in your working practices, not recreated at year end. Put lightweight habits in place:

  • Define hypotheses up front: what advance are you aiming for, what baselines and metrics will you use, and what makes this uncertain.
  • Track experiments: use a run tracker or experiment log that stores parameters, datasets, commits and outcomes. Screenshots or exports help.
  • Tag time by project and phase: engineering time tagging to R&D tasks, code reviews, data prep for experiments, and production hardening. Only R&D phases are claimable, but tagging everything gives credibility.
  • Keep data lineage notes: where data came from, what transformations were applied, and why those steps were necessary for the experiment.
  • Save failures: dead ends are powerful evidence of uncertainty. Keep short summaries of what you tried and why it did not work.
  • Keep subcontractor evidence: SOWs, milestone notes, and acceptance criteria tied to uncertainties and metrics.
  • Align finance: use cost centres and nominal codes for R&D payroll, EPWs, subcontractors, and consumables. That makes reconciliation clean at claim time.

Building a robust technical narrative

Your narrative should be concise, technical, and specific.

  • Context: the system or domain and the limitation in the state of the art.
  • Uncertainty: what you could not resolve with publicly available knowledge or routine skill.
  • Approach: the experiments, alternatives tested, and why each path might have failed.
  • Outcomes: results, including partial success or failure. Tie to metrics, not adjectives.
  • Team: competent professionals involved, with brief credentials.
  • Time and costs: how you estimated qualifying time and mapped costs.

Avoid generic claims of innovation. Show your working and your dead ends. Use numbers and thresholds for performance or stability.

Accounting treatment and cash runway

How you account for R&D affects your management accounts and planning:

  • Expense vs capitalise: under FRS 102 you may capitalise development costs when criteria are met, such as technical feasibility and intention to complete for use or sale. Research costs are expensed. Capitalisation improves EBITDA but creates amortisation later and may reduce the immediate R&D deduction. Model both impacts before you commit.
  • Deferred tax: if you capitalise development and create temporary differences, you may recognise deferred tax. This impacts reported profit and investor packs. Make sure your monthly management accounts and board packs explain the bridge between statutory and cash.
  • Loss surrender and timing: R&D credits can arrive months after year end. Build a realistic timeline for tax filings, HMRC processing, and any enquiry risk so your cash runway and revenue forecasting reflect timing, not optimism.
  • Cash flow presentation: separate R&D eligible costs in your chart of accounts so you can model claim size and sensitivity. This also supports clean audit trails and faster HMRC responses.

If you need help turning experiments and costs into board-ready numbers, our team of chartered management accountants can set up monthly management accounts that tie KPIs to spend and claims.

Are R&D tax credits still worth it for startups in 2025?

Yes, if your work genuinely pushes the boundary and you document it well. Rates have changed, and compliance is stricter, but for many deep tech and applied AI teams, the benefit remains material. The claim also disciplines your engineering practice. Clear hypotheses, experiment logs, and cost tracking do not just help tax, they improve delivery and investor confidence.

Practical checklist for December year ends

  • Confirm eligibility projects and map uncertainties to experiments.
  • Check claim notification requirements and deadlines.
  • Stand up or tidy time tracking and experiment logs for the period.
  • Reconcile payroll, EPWs, subcontractors and cloud costs to R&D cost centres.
  • Draft technical narratives now, not after year end.
  • Review subcontractor scopes and territoriality.
  • Decide on capitalisation policy for development and model the P&L, cash, and deferred tax impact.
  • Prepare enquiry pack materials: logs, SOWs, metrics, version control evidence, cost reconciliations.

Final thoughts and next steps

R&D relief is still a valuable cash lever for UK tech and AI startups, but it now demands clean evidence and careful accounting. If you want a quick, no-nonsense view of eligibility, a draft technical narrative, and a finance mapping that protects your runway, book a free eligibility screening and documentation prep with Venn. Our accountants will help you align engineering reality with a compliant, defensible claim and keep your management reporting investor ready.