Who can claim R&D relief when a customer funds our software project?
The company that decided the research and development needed doing is the one that can claim, not the company that paid for it. For accounting periods beginning on or after 1 April 2024, HMRC's position is blunt: only the company that makes the decision that R&D needs to be carried out can claim the relief. When a customer funds your project, the money does not settle the question. What settles it is whether you worked out for yourself that R&D was needed to deliver what you promised, or whether the customer had already identified that R&D and handed it to you to do. R&D here means work to resolve a genuine scientific or technological uncertainty, not ordinary coding, integration or configuration that a competent developer could do without breaking new ground.
This is the question we are asked most often by founders of UK software companies with a payroll and a signed development contract, and it is the one most often got wrong in both directions. Companies claim for work that was really the customer's to claim, and companies quietly give up claims they were fully entitled to make because a customer's invoice was involved. Our accountants for technology and SaaS companies work it out from the contract and the facts, not from who sent the invoice. If your question is narrower, about a specific developer cost you have not yet paid, our guide on claiming R&D relief on an unpaid developer invoice covers the payment condition on its own; this page is about who owns the claim in the first place.
What makes it contracted-out R&D, and when does the customer claim instead?
It is contracted-out when the customer, at the time of the contract, intended or contemplated that R&D of that kind would be done to meet it. HMRC's contracted-out R&D guidance puts the test plainly: the party who takes the decision to undertake or initiate the R&D is the one who can claim. The phrase intended or contemplated goes beyond a vague awareness that some R&D might happen; it means the customer had a specific appreciation of the R&D that would be needed, judged from the terms of the contract and the surrounding circumstances. So a customer that writes a detailed technical specification, directs how the problem is solved and carries the risk if it fails has contracted out the R&D, and the claim is theirs. A customer that asks for a working outcome and leaves the method, and the risk, to you has not.
The flow above is the question in one move, but the detail that decides real cases is in the contract. Who specified the technical approach? Who signed off the uncertainty as something that had to be solved? Who loses money if the R&D does not work? Line those up and the answer is usually clear, even when the invoices all point one way. The table sets out the common arrangements a software company meets and who holds the claim in each. If you want this checked against your own contract wording before a claim goes in, our tax planning and advisory team reviews the agreement and the facts together, because the two have to agree.
Five arrangements a funded software company meets, and who holds the R&D claim in each:
| The arrangement | Who decided the R&D was needed and carries the risk | Who can claim |
|---|---|---|
| Customer specifies the technical approach and directs the work | The customer | The customer, as contracted-out R&D |
| Customer asks for an outcome; you solve an uncertainty they did not foresee | You | You |
| Customer buys your existing product or licence and funds improvements to it | You, on your own roadmap | You |
| Customer is overseas or otherwise not within UK corporation tax | The customer, but it cannot claim here | You, under the irrelievable client rule |
| A grant or innovation fund pays toward your own project | You | You, with no subsidy restriction |
Does being paid by a customer reduce our claim?
No, not under the current rules, and this is one of the biggest changes most founders have not caught up with. The merged scheme that took effect from 1 April 2024 removed the old restriction on subsidised expenditure altogether. HMRC's guidance on which R&D costs you can claim states there is no restriction on claiming for subsidised costs under the merged scheme or enhanced R&D intensive support. Under the previous small and medium enterprise (SME) scheme, expenditure that someone else paid for, including a customer funding your work, was pushed out of the more generous SME relief and into the less generous expenditure credit. That penalty is gone.
The practical effect is that funding and entitlement are now two separate questions. The fact that a customer's money, or a grant, paid for the R&D does not shrink the claim by a penny. What decides the claim is the contracted-out question above: did you or the customer decide the R&D was needed. Founders who still assume a funded project is worth less, or not worth claiming at all, are often leaving a full claim on the table. If you have been discounting funded work out of habit, it is worth a fresh look at the periods still in time to amend.
When can we still claim even though the customer paid?
There are two routes that keep the claim with you even on a funded project. The first is your own initiative inside a paid contract. A customer can hire you to build a system and know nothing of the technical uncertainty you will have to resolve to deliver it. If you are the one who works out that R&D is needed, and you carry the risk of it not working, the relief is yours. The test is about who intended the R&D, not who is paying the bill, so a fixed-price contract to deliver something genuinely hard is often your claim, not the customer's.
The second route is the irrelievable client rule. Even where the customer did contract out the R&D, you can claim if that customer is what HMRC calls an irrelievable client, broadly a person not within the charge to UK tax on a trade, or a company that could not itself claim. An overseas customer with no UK tax presence, or a non-trading or non-taxable body, falls into this. Because the relief would otherwise be lost to everyone, the rules let the contractor claim it instead. For a UK software company selling to customers abroad, this is worth checking on every funded project, because it can turn a claim you assumed belonged to the customer into one you can make yourself.
Which costs count toward the claim, and how much of each?
Once you know the claim is yours, the next question is which costs qualify and in what proportion. Your own employees' time on the R&D counts in full, for the share of their time actually spent on it. Payments to an unconnected subcontractor, or to an agency that supplies you workers, count at 65% of what you pay. And since 1 April 2023 the cost of data licences and cloud computing used for the R&D qualifies too, which matters for a SaaS company running experiments and training workloads on cloud infrastructure. The chart shows how the same pound of spend counts differently depending on where it goes.
The trap is a connected subcontractor, for example another company in your own group. There you cannot simply take 65% of what you paid. HMRC's guidance on contractor payments requires you to claim the lower of the payment you made and the subcontractor's own relevant cost of doing the work, and only where those amounts are brought into its accounts under normal accounting standards. You can even elect to be treated as connected with an otherwise unconnected contractor, which can help where their actual cost is lower than their price, but the election is irrevocable, covers every payment under that contract, and must reach HMRC in writing within two years of the end of the accounting period in which you entered the contract, with no extension. Miss that window and the choice is gone.
What counts, and the evidence worth keeping, on a customer-funded R&D claim:
| Cost type | What counts | Evidence to keep |
|---|---|---|
| Employees on the R&D | The R&D share of their cost, in full | Time records or a reasoned apportionment, and payroll |
| Externally provided workers | 65% of the payment to an unconnected staff provider | The staff provider contract and invoices |
| Subcontracted R&D | 65% to an unconnected contractor; the lower-of rule for a connected one | The subcontract, invoices, and the connected party's own cost |
| Data and cloud computing | The R&D related amount, in full | Supplier invoices and the split between R&D and other use |
| The entitlement itself | That you, not the customer, decided the R&D | The contract terms and a short note of who identified the R&D |
What is the claim worth, and how do we prove it is ours?
Under the merged scheme the relief is an expenditure credit of 20% of your qualifying R&D spend. The merged scheme guidance confirms the credit is taxable, because HMRC treats it as trading income, so the cash benefit after corporation tax is lower than the headline, usually somewhere around 15 to 16 pence in the pound depending on your tax rate. A loss-making company that is R&D intensive, meaning its qualifying R&D is at least 30% of its total expenditure, can instead use enhanced R&D intensive support, which gives an extra 86% deduction on qualifying costs and a payable tax credit worth up to 14.5% of the surrenderable loss. Both routes apply to accounting periods beginning on or after 1 April 2024, and HMRC's guidance on how to work out your R&D tax relief sets out the arithmetic.
On a customer-funded project the figure is only safe if the entitlement behind it is documented. HMRC's compliance checks on R&D claims now routinely ask who decided the R&D was needed, so the contract and a short record of how the uncertainty was identified matter as much as the cost schedule. A claim that is right on the numbers but cannot show whose decision the R&D was is the kind that comes back with questions. The checklist below is the order we work through before a funded claim goes in.
Customer funded R&D eligibility checklist
Run this before you build the claim. It is the order we use for a funded software project.
- Read the contract for who decided the R&D was needed and who carries the risk if it fails.
- Separate work that resolves a genuine technological uncertainty from ordinary build and configuration.
- If the customer specified and directed the R&D, treat it as theirs, unless they sit outside UK tax.
- If the customer is overseas or otherwise cannot claim, check whether the relief is yours instead.
- Remember that customer funding no longer reduces the claim, so do not discount it for being paid.
- List qualifying costs at the right proportion: own staff and data and cloud in full, unconnected subcontractors and agency workers at 65%.
- For a connected subcontractor, use the lower of your payment and their cost, and make any connection election within two years.
- Keep the contract, a note of who identified the R&D, and the cost schedule together as one evidence pack.
Our position, after handling company tax and R&D claims for software companies, is that the entitlement question should be settled at the start of a funded project, not at the end. Put one line in the contract that records who identified the R&D and who carries the risk, and the claim argues itself a year later. Leave it unsaid and you are reconstructing intention from memory while HMRC asks pointed questions. LOYALS is a King's Cross firm of accountants and business consultants that handles company tax and R&D claim positions for UK software companies, and on a customer-funded project the first thing we settle is whose claim it is, before a single cost is added up.