Does Bespoke Software Qualify For R&D Tax Relief In The UK?

Bespoke is a commercial description. It is not a tax one.

HMRC has no interest in whether anyone else owns software like yours, only in whether your developers pushed the underlying technology past where it already sat. That distinction is why bespoke software development and qualifying R&D are different categories that happen to overlap sometimes.

It costs UK businesses real money in both directions. Some companies claim nothing on work that genuinely qualifies, and far more claim on work that does not, then spend eighteen months in an enquiry defending it.

The software slice is large. The most recent HMRC R&D tax credit statistics recorded 46,950 claims for the 2023 to 2024 tax year worth £7.6bn, with Information and Communication accounting for 26% of claims and 21% of the amount.

The rules those claims run under changed substantially for accounting periods beginning on or after 1 April 2024. Here is what qualifies, what does not, what the tribunals have decided, and what HMRC now expects to see before it pays.

This article is general information, not tax advice. R&D relief turns on the specific facts of your project and your company, so speak to a qualified R&D tax adviser or to HMRC directly before you claim.

What Test Does HMRC Apply to Software?

Two conditions must both hold: the project sought an advance in overall knowledge or capability in a field of science or technology, and it did so by resolving scientific or technological uncertainty.

Both come from the DSIT Guidelines on the Meaning of Research and Development for Tax Purposes, which apply to accounting periods beginning after 31 March 2023 and are reproduced in full in HMRC’s manual.

Read the two conditions slowly, because almost every rejected claim fails on a word inside them. The paragraph numbers matter too, and no competitor guide quotes them.

Paragraph	What it says	Why it decides software claims
Para 6	An advance means an advance in overall knowledge or capability in a field, not a company’s own state of knowledge alone	Your team learning something the field already knows is training, not research
Para 8	Something does not become an advance simply because science or technology was used to create it	Writing software is not by itself R&D
Para 9(c)	An appreciable improvement to an existing process or product through technological change can qualify	The only route by which improving something existing counts
Para 12	Routine analysis, copying or adaptation of an existing product will not be an advance	Catches most custom builds and most re-platforming work
Para 13	Uncertainty exists where feasibility, or how to achieve something in practice, is not readily available or deducible by a competent professional	Includes system uncertainty from combining components in novel ways
Para 14	Improvements, optimisations and fine-tuning that do not materially affect the underlying technology are excluded	Caching, indexing and performance tuning usually fail here
Para 20	Overall knowledge or capability means what is publicly available or readily deducible by a competent professional	This is the baseline you must describe
Paras 33-34	R&D begins when work to resolve the uncertainty starts and ends when it is resolved or abandoned	Sets the project boundary, and excludes what sits outside it
Para 42	Cosmetic and aesthetic work is excluded, unless achieving the effect required a technological advance	Rules out most user experience work

An Advance Means an Advance in the Field, Not in Your Company

Overall, not yours. If a competent developer elsewhere already knows how to do the thing, you learning to do it is training rather than research.

Paragraph 8 closes the obvious loophole. A product, process or service does not become an advance in science or technology simply because science or technology was used to create it.

Uncertainty Means Technologically Uncertain, Not Commercially Risky

Budget risk is not uncertainty. Nor is a tight deadline, a difficult client, an undocumented third-party API, or a team that has not used the framework before.

Those are project risks, and HMRC sees them in almost every rejected claim. Paragraph 13 does recognise system uncertainty, where combining established components in a genuinely new configuration creates an unknown, and that is the one route through this for integration-heavy work.

You Have to State Your Baseline

HMRC’s software guidance at CIRD81960 asks a specific question: what was the state of the art before you started, and what capability was missing from it? A claim that cannot describe the existing technological baseline cannot show it was advanced.

Complexity alone will not carry you. HMRC states plainly that system complexity does not by itself constitute uncertainty, and that you must explain why standard assembly of existing components would not have worked.

Where the R&D Starts and Stops

Paragraphs 33 and 34 of the guidelines set the boundary. R&D begins when work to resolve the uncertainty starts, and ends when it is resolved or the attempt is abandoned.

That excludes a great deal of the project around it. Requirements gathering, confirmatory testing, deployment and routine maintenance all sit outside the boundary, whatever stage of the development lifecycle they occupy.

Why Does Most Bespoke Software Fail That Test?

Because most bespoke software is the competent application of technology that already exists. Building something nobody else has is a commercial achievement rather than a technological advance, and HMRC draws that line hard.

A typical custom build takes proven frameworks, proven cloud services and proven patterns, then arranges them to fit one organisation’s processes. That is skilled work, and it is the same work described in the difference between bespoke and off-the-shelf software, where the value is fit rather than novelty.

The Four Things People Wrongly Assume Qualify

• It was built from scratch. Building from scratch is a procurement decision, not evidence of an advance.
• Nobody else has this system. Uniqueness of configuration is not uniqueness of technology.
• It was technically hard. Hard for your team is not the same as hard for a competent professional in the field.
• It cost a lot. Spend is a measure of scope, not novelty.

That last one catches finance teams in particular. A six-figure invoice tells you about scope and rates, which is what software development costs are actually driven by, and nothing at all about whether the technology moved.

Where a Genuine Advance Does Show Up

Real qualifying work in software tends to be narrow and buried. It is usually one component inside a larger build rather than the build itself.

A good sign is that your senior engineers argued about whether it was possible. Another is that you built and discarded more than one approach.

A third is that the answer was not in the documentation, on a forum, or in any published paper you could find. HMRC publishes four worked software case studies covering cloud token passing, machine-learning fraud detection, video streaming integrity and image authentication, and they are the clearest picture of where it draws the line.

Which Software Activities Qualify and Which Do Not?

Framework-based application building, documented API integration, user experience work, like-for-like re-platforming and performance tuning almost never qualify. Algorithmic work with no published solution, extending a tool beyond its designed operating parameters, and genuine feasibility problems sometimes do.

Software activity	Qualifies?	Why
Building a CRM or booking system on an established framework	No	Frameworks used the way they were designed to be used
Integrating accounting, CRM and warehouse systems over documented APIs	No	Routine integration. The uncertainty is scheduling and scope, not technology
Redesigning a checkout journey to cut drop-off	No	Cosmetic and user experience work, excluded at paragraph 42
Rebuilding a legacy system in a modern language with the same behaviour	No	A port using known methods. Expensive and risky, but the technology exists
Adding caching and indexes to make an existing product faster	No	Fine-tuning that does not materially affect the underlying technology, paragraph 14
Developing a scheduling algorithm where no published approach handles your constraint set at the required scale	Possibly	The advance is in capability. Needs evidence that known approaches were tried and failed
Extending an open-source database or framework beyond its designed operating parameters	Possibly	CIRD81960 gives this as a qualifying example
Getting a model to run inference on constrained edge hardware where existing methods will not fit	Possibly	Genuine feasibility uncertainty, not implementation effort
Combining established components where the combination itself creates an unknown	Possibly	System uncertainty under paragraph 13, and the hardest to evidence

Where AI and Machine Learning Work Sits Differently

The edge inference row is the one that has grown most. Model deployment against a hard latency or memory constraint is a real feasibility question, which is why AI and machine learning work produces more defensible claims than most software categories.

It is also why a proof of concept is worth running before the build. A costed proof of concept generates exactly the contemporaneous evidence a claim later needs.

Why the Expensive Rows Are Usually the Ones That Fail

The reverse is also true of the rows marked no. A scoped MVP build on established frameworks is good business and poor R&D, and a legacy modernisation programme is the clearest example of expensive work that almost never qualifies.

How Do You Work Out Whether Your Own Project Qualifies?

Run six questions in order and stop at the first no. If you cannot answer all six with evidence, you do not have a claim you would want to defend.

No competitor guide gives a sequential test. This is the one we use before anyone writes a narrative.

Step	Question	Fails if
1	Can you name the field of technology being advanced?	The answer is your industry rather than a technology
2	Can you describe the baseline: what was publicly available or readily deducible before you started?	You cannot say what already existed
3	Was the gap something a competent professional in that field could not readily resolve?	A senior engineer elsewhere would have known the answer
4	Did you try approaches that failed, and can you show them?	The first approach worked, or nothing was recorded
5	Can you identify where the uncertainty started and where it was resolved?	The boundary covers the whole project
6	Can you apportion cost to that boundary rather than to the project?	The claim attaches whole-team salary to one component

How to Run the Test on a Project Ledger

Work component by component rather than project by project. A twelve-month build might contain three weeks of qualifying work, and that is a normal, defensible outcome.

Ask the engineers who did the work, not the finance team who paid for it. The competent professional has to be someone with relevant experience in the specific technology, which is often the same person who set the technical requirements in the first place.

What a Failed Step Actually Means

A no at step three is fatal and worth accepting quickly. A no at step four is usually a record-keeping failure rather than an eligibility one, and it can be fixed for the next project even if not for this one.

HMRC’s own Guidelines for Compliance work through identifying qualifying activities in the same order, and reading part 4 before you commission an adviser is time well spent.

Talk to us about scoping a software project properly

What Has the Tribunal Actually Decided About Software?

Two First-tier Tribunal decisions two days apart in July 2024 went opposite ways on software claims. The difference was evidence rather than technology, and no competitor guide on this subject mentions either case.

Case	Citation	Outcome	The lesson
Get Onbord Ltd (in liquidation) v HMRC	[2024] UKFTT 617 (TC), 9 July 2024	Taxpayer won	Using open source and existing tools does not make work routine; experience can make a competent professional
Tills Plus Ltd v HMRC	[2024] UKFTT 614 (TC), 11 July 2024	Taxpayer lost	The technology may have been fine; the evidence was not
Flame Tree Publishing Ltd v HMRC	[2024] UKFTT 349 (TC), 25 April 2024	Taxpayer lost	A digitisation project failed the guidelines tests
Collins Construction Ltd v HMRC	[2024] UKFTT 951 (TC), 21 October 2024	Taxpayer won	Expenditure was neither subsidised nor contracted out; HMRC did not appeal
Stage One Creative Services Ltd v HMRC	[2024] UKFTT 1059 (TC)	Taxpayer won	Same points as Collins, and HMRC updated its guidance in March 2025 as a result

Get Onbord: Open Source and the Competent Professional

In Get Onbord Ltd v HMRC, the tribunal allowed the appeal over an AI-driven know-your-customer system. It held that using existing code libraries and open-source material is common in software development and does not by itself make work routine.

The reasoning is worth quoting to anyone who tells you otherwise: if complete novelty were required, no software project would ever amount to R&D. The tribunal found the work went beyond routine adaptation on the evidence of substantial new code and novel data-normalisation algorithms.

The second holding is more useful to most SMEs and gets less attention. The company’s technical lead qualified as a competent professional despite having no formal IT qualifications, on the strength of twenty-five years of relevant experience and current technical knowledge, which matters when your senior engineers came up through practice rather than a degree.

Tills Plus: The Same Month, the Opposite Result

Two days earlier, Tills Plus Ltd lost on electronic point-of-sale software. The decision turned on the company’s inability to evidence what was uncertain and what was tried, along with problems in the subcontractor payments.

Read together, the pair say something plain. The technology decides whether you have a claim, and the documentation decides whether you keep it.

What the Cases Tell You to Keep

• Architecture decision records naming the options considered and why each was rejected.
• Spike tickets and their outcomes, including the approaches that did not work.
• Commit history and branch names that show iteration rather than a single straight line.
• A written statement from the competent professional, dated at the time rather than at claim time.

Teams that already work to documented development practices produce most of this without extra effort. Teams that do not end up reconstructing it eighteen months later, which is the position Tills Plus was in.

Which Costs Can You Claim on a Software R&D Project?

Staff costs, externally provided workers and subcontractors subject to a restriction, software licences, data licences and cloud computing, and consumables. Only the portion attributable to the qualifying R&D counts.

The cost side is where otherwise defensible claims get cut back. Companies identify a genuinely novel component, then attach twelve months of whole-team salary to it.

Cost category	What you can claim	Main restriction
Staff costs	Gross salary, employer NI, employer pension contributions and some bonuses, apportioned to R&D time	Apportionment must be evidenced. Dividends paid to director-shareholders do not qualify
Externally provided workers	65% of the payment attributable to qualifying earnings, apportioned to R&D	Overseas workers only qualify where earnings are within UK PAYE
Subcontracted R&D	65% of the relevant portion of payments to unconnected subcontractors	Connected parties instead take the lower of the payment and the provider’s own relevant expenditure
Software licences	Development, test, modelling and analysis tooling used in the R&D	Apportion out any business-as-usual use
Data licences and cloud computing	Datasets acquired for the R&D, plus compute and storage consumed by it	Accounting periods beginning on or after 1 April 2023 only. Hosting the live product does not count
Consumables	Power, water, fuel and materials consumed in the R&D	Rarely material on a software project
Not claimable	Rent, capital purchases, production hosting, marketing, recruitment fees, patent and legal costs	These sit outside the qualifying categories

The 65% Rule Is Narrower Than People Think

For externally provided workers, the 65% applies to the payment attributable to qualifying earnings, not to the whole invoice. HMRC’s worked example runs it as 65% of the qualifying portion, so if 60% of a payment is qualifying earnings you claim 39% of the total.

It is also the unconnected-party rule only. Where the parties are connected, or elect to be treated as connected, the restriction becomes the lower of the payment and the provider’s own relevant expenditure, which can be higher than 65%.

The Overseas Restriction Catches a Lot of Software Companies

For accounting periods beginning on or after 1 April 2024, contracted-out R&D must generally be carried out in the UK, and overseas externally provided workers only count where their earnings are subject to UK PAYE and National Insurance.

There is a narrow statutory exception. Overseas work still qualifies where the R&D requires geographical, environmental, social, legal or regulatory conditions not present in the UK, and where it would be wholly unreasonable to replicate them here.

Two reasons are ruled out by the legislation itself: cost, and availability of workers. If your development team sits abroad because it is cheaper or because UK engineers were hard to hire, that spend no longer qualifies, and there is no de minimis threshold, which is a real change for anyone using offshore delivery.

The PAYE and National Insurance Cap

Payable credits are capped at £20,000 plus 300% of the company’s relevant PAYE and National Insurance liabilities. It applies to the merged scheme and to ERIS for periods beginning on or after 1 April 2024.

An exemption exists for companies creating or managing relevant intellectual property whose connected-party subcontracting and worker spend is under 15% of total qualifying expenditure. It is one of the points the new advance assurance service will rule on.

Which Scheme Applies and What Is a Claim Worth?

For accounting periods beginning on or after 1 April 2024, almost everyone claims under the merged R&D expenditure credit scheme at a headline 20% of qualifying spend, worth roughly 15p to 16.2p per £1 after tax. Loss-making R&D-intensive SMEs can instead use Enhanced R&D Intensive Support, worth up to 26.97p per £1.

Scheme	Who it is for	Headline rate	Approximate value
Merged R&D expenditure credit	Companies of any size, periods beginning on or after 1 April 2024	20% of qualifying spend, taxable as income	About 15p per £1 at the 25% main rate, about 16.2p where the 19% notional rate applies
Enhanced R&D Intensive Support	Loss-making SMEs where qualifying R&D is at least 30% of total relevant expenditure	86% additional deduction plus up to a 14.5% payable credit	Up to 26.97p per £1 of qualifying spend
Legacy SME scheme and old RDEC	Periods beginning before 1 April 2024	Varies by period	Still claimable on open or amendable returns

How the Merged Scheme Works in Practice

The merged scheme is an above-the-line credit modelled on RDEC. It is calculated at 20% of qualifying expenditure and then taxed, which is why the net benefit lands at 15% for a company paying the 25% main rate.

Loss-making companies get a slightly better result, because the credit is restricted using a 19% notional rate rather than 25%, giving a net 16.2%. A company in marginal relief lands between the two.

ERIS and the 30% Intensity Test

ERIS is for loss-making SMEs where R&D is most of what the company does. The threshold dropped from 40% to 30% for accounting periods beginning on or after 1 April 2024, and the test aggregates the claimant with every connected company.

There is a carry-through rule rather than a blanket grace year. If you claimed under ERIS or the old SME scheme for your previous twelve-month accounting period and met the intensity condition then, you can still use ERIS in a period where you fall below the threshold.

An SME here means fewer than 500 staff, together with either turnover of €100m or less or a balance sheet total of €86m or less. Linked and partner enterprises are aggregated, which catches a lot of AI companies that have taken corporate investment.

How Far Back You Can Claim

An R&D claim must be made, amended or withdrawn within two years of the end of the accounting period, where that period is eighteen months or less. Note accounting period, not period of account, because a long period split into two moves the deadline.

For older periods you would be claiming under the legacy SME scheme or old RDEC rules at those periods’ rates. The claim notification requirement can still block a first-time claim for periods beginning on or after 1 April 2023.

If a Supplier Built Your Software, Who Claims?

Whoever intended or contemplated that the R&D would be done. Under the merged scheme’s contracted-out rules, the customer claims where it knew what R&D would be needed and specified it, and the supplier claims where it independently decided that resolving an uncertainty was necessary to deliver an outcome.

This is the question a software agency’s client actually asks, and the SERP does not answer it. The test sits in section 1133(2) of the Corporation Tax Act 2009 and is worked through in HMRC’s contracted-out R&D guidance.

The Intended or Contemplated Test

HMRC looks at the contract and the surrounding circumstances, and asks whether it is reasonable to assume the customer intended or contemplated that R&D of that sort would be done. Vague awareness is not enough.

The guidance requires a specific appreciation of what R&D will be done, and therefore the ability to understand and specify it. The framing question is whether the customer’s objective was to have software developed, or simply to have deliverables completed.

What HMRC Weighs in the Contract

Scenario	Who is likely to claim	What to write into the contract
Customer specifies the technical approach, owns the IP and carries delivery risk on time and materials	The customer	Record that the customer identified the uncertainty and directed the work
Customer buys a fixed-price deliverable and the supplier decides how to achieve it	The supplier	Record that the supplier initiated and bore the risk of the R&D
Customer knows a hard technical problem exists and asks the supplier to solve it	The customer	Name the technical problem in the statement of work
Neither party discussed R&D and it emerged during delivery	Contested. Agree it in writing before either claims	Add an R&D allocation clause at contract stage

Both parties cannot claim for the same work. Settling it at contract stage costs nothing, and it belongs with the other terms in a software development contract.

Where the answer is genuinely unclear, this is one of the two areas the new advance assurance service will give a ruling on, which is more useful than an adviser’s opinion. It is also worth raising during technical due diligence if you are buying a company that has claimed.

What Does HMRC Require When You Submit a Claim?

An additional information form, mandatory for every claim submitted on or after 8 August 2023, and for new or lapsed claimants a claim notification form filed within six months of the end of the period of account. Miss the notification and the claim is invalid.

Both were introduced to raise the cost of a speculative claim, and the effect shows. Claim volumes fell 26% in the 2023 to 2024 statistics, and first-time applicants fell 41% overall the year before, with a 45% drop inside the SME scheme.

The Claim Notification Trap

For accounting periods beginning on or after 1 April 2023, a company claiming for the first time, or that has not claimed in the previous three years, must notify HMRC in advance. The window opens on the first day of the period of account and closes six months after it ends.

A 31 March year end therefore means 30 September, well before the corporation tax return is due. Check the period of account you actually filed at Companies House, because companies with a long or short first period get this wrong.

Two details catch people out. The three-year lookback runs from the last date of the notification period rather than the accounting period end, and a previous claim does not exempt you if it was made in an amendment submitted on or after 1 April 2023 or if HMRC rejected it.

The Additional Information Form

The additional information form has to be submitted before or on the same day as the return. Without it, HMRC removes the claim from the return entirely.

It asks for project descriptions written against the guidelines, a cost breakdown by category, the name and role of the senior officer responsible, and details of any agent who advised on the claim.

The Senior Officer and the Agent

Naming a senior officer puts a person’s signature against the technical narrative. That is deliberate, and it changes how carefully most boards read what an adviser has written on their behalf.

HMRC introduced the agent disclosure requirement for the same reason. Over 90% of claimants use an agent, and HMRC has said it takes action against advisers who breach its standard.

If nobody in your business can judge the technical narrative before that signature goes on it, get someone who can. A fractional CTO reading the claim is cheaper than an enquiry defending it.

Can You Get Certainty Before You Claim?

Yes, and this changed in May 2026. HMRC now runs two advance assurance services for SMEs alongside the older statutory route, and both give a ruling before you spend money on a claim narrative.

Every competitor guide on this subject was written before these went live. If you are deciding whether to claim on a software project, this is the most useful thing on the page.

Service	What it covers	Who can use it
Targeted advance assurance	Up to two specific areas, such as whether the project is R&D, whether overseas expenditure qualifies, who holds a contracted-out claim, or the PAYE cap exemption	SMEs that have not already claimed for the period
Full claim advance assurance	The whole first claim, covering the first three accounting periods	First-time claimants with turnover under £2m and fewer than 50 employees
Statutory advance assurance	The older scheme, still available	SMEs meeting the original conditions

Targeted Advance Assurance

The targeted service went live on 18 May 2026 and runs as a pilot to May 2027. It is the right route where you are confident about most of a claim and uncertain about one or two points.

For software companies the two most common uses are whether a specific component is R&D at all, and who holds the claim on contracted-out work. Both are the questions that otherwise surface eighteen months later in an enquiry.

Full Claim Advance Assurance for First-Time Claimants

The full claim service suits a smaller company making its first claim, and it covers three accounting periods rather than one. The size limits are tight, so check them before building a plan around it.

Neither service is available if you have already claimed for the period, so the decision has to be made early. That is an argument for raising R&D relief during project scoping rather than at year end, alongside the rest of the budget.

What Happens if HMRC Opens an Enquiry?

HMRC will ask for the technological baseline, the specific uncertainties, the alternatives you tried, and evidence supporting the cost apportionment. Contemporaneous records carry far more weight than a narrative written after the fact.

What HMRC Asks For

• The state of the art at the start, and how you established it.
• The name, role and experience of the competent professional, and what they concluded.
• The approaches attempted and why each was abandoned.
• Time records or a defensible apportionment method behind every cost line.
• Where the project boundary sits, and what you excluded from it.

The Evidence Pack to Keep as You Go

Everything on that list is cheap to produce during a project and expensive to reconstruct afterwards. Tills Plus lost on exactly this point.

Build it into how the work runs rather than into a year-end scramble. Architecture decision records, spike outcomes and dated technical notes cost nothing when they are part of normal delivery practice.

Why HMRC Is Still Difficult About Software

The history explains the posture. HMRC’s random enquiry work put error and fraud at 16.7% of relief paid in the 2020 to 2021 tax year, £1.13bn, rising to 24.4% within the SME scheme, and its later report showed 78% non-compliance on claims under £10,000 and 38% among first-time claimants against 22% for repeat claimants.

Those figures have fallen sharply since. The same report puts the illustrative 2023 to 2024 estimate at 7.8%, which is less than half the 2020 to 2021 level, so anyone quoting 16.7% as current is years out of date.

The institutional caution has not fallen at the same rate. The Chartered Institute of Taxation has publicly warned that valid claims are still being rejected, and that HMRC’s volume compliance approach strips claims without opening a full enquiry.

The practical response is to write the claim the way HMRC reads it. Guidelines for Compliance GfC3, published in October 2023 and updated in January 2025, sets out what it expects to see, including how it treats the competent professional.

Related Guides

Related: What Is Bespoke Software?

Related: How Much Does Bespoke Software Development Cost?

Related: What Should Be in a Software Development Contract?

Related: What Is an MVP in Software Development?

Related: How Much Does AI Software Development Cost?

Related: What Is Legacy Software Modernisation?

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