Can we claim R&D relief on a developer invoice we have not paid yet?
Not yet. R&D relief only recognises a cost once you have paid it, so a developer invoice still sitting in your purchase ledger as an accrual does not qualify, however clearly it relates to a real development project. HMRC's own guidance puts it plainly: you must have already paid the cost to claim the relief, and costs not paid before the claim is made are not eligible.
That catches a lot of software companies out, because your accounts and your claim are not working to the same rule. For the accounts, the cost belongs in the year the work was done, whether or not the money has left the bank. For the claim, what matters is whether the cash has actually moved. A developer who invoices you in March for a sprint you are still arguing over in July is a cost in this year's profit and loss, and a non-starter for this year's R&D claim until you settle it.
None of this means you lose the relief. It means you have to get the order right and, where the cash is tight, decide whether to pay the invoice before you file or carry the cost into the period you eventually pay. If you want the wider picture of how a software company's claim is built, our guide to R&D tax credits for SaaS companies sets out the scheme, and our accountants for tech and software companies handle the claim itself. The rest of this page is about the one problem in front of you: an invoice that is not paid.
Is it an employee, an agency worker or a contractor?
Before the timing matters, work out what the developer actually is to your company, because the three answers are claimed in three different ways and only one of them arrives as an invoice at all. An employed developer is paid through payroll, so there is no invoice, and the cost is a staff cost you claim in full for the time spent on qualifying R&D. An invoice almost always means one of the other two: an externally provided worker supplied through an agency, or a contractor company you have engaged to do a piece of the build.
The distinction changes the number. For an externally provided worker who is not connected to you, you claim 65 percent of the payment. For contracted-out R&D, where your company decided on and planned the work, the same 65 percent applies to an unconnected contractor, for accounting periods beginning on or after 1 April 2024. Where the developer's company is connected to yours, a different, usually lower, figure applies, which the next section but one covers. Overseas work is restricted, with limited exceptions, so a developer sitting outside the UK needs checking before you assume the cost is in.
What you keep for the claim depends on which of the three the developer is. This is the evidence that supports an R&D claim for a UK software company, and the paid-before-claim rule applies to every row.
| Type of developer | How it reaches you | Share you can claim | Evidence to keep |
|---|---|---|---|
| Employed developer | Payroll, no invoice | Full cost for qualifying time | Payroll records, an apportionment of time spent on R&D, paid by the 9-month point |
| Agency or externally provided worker | Agency invoice | 65 percent of the payment if unconnected | The agency contract, the invoice, proof of payment, who directed the work |
| Contractor company (unconnected) | Contractor invoice | 65 percent of the qualifying payment | The contract showing you planned the R&D, the invoice, proof of payment, where the work was done |
| Contractor company (connected) | Contractor invoice | Lower of the payment and the contractor's own relevant costs | The contractor's accounts for the work, their relevant expenditure, any connected election |
Which dates decide whether the unpaid invoice counts?
Three dates settle it: when the cost was booked, when your accounting period ends, and when you actually pay. The cost is recorded in the accounts for the period the R&D happened. If the invoice is still unpaid at the period end it sits there as an accrual, and an accrual is not an eligible R&D cost. Once you pay, the payment condition is met and the cost belongs in the claim, which you then file. The order runs one way, as the timeline below shows.
Employed developers have their own version of the same idea. Wages or a bonus that stay unpaid more than nine months after the balance sheet date are not relieved in that year, and are instead claimed in the later period when they are actually paid. HMRC sets this out in its payment condition guidance for the reformed R&D reliefs, which confirms that no amount can be validly claimed before it has been paid. A director's pay is treated as paid once it is credited in the company's records, even if the cash is not drawn, so a developer-director who leaves pay in the company can still have it count, provided the bookkeeping is right.
In practice the trap is the accrual at year end. A healthy software company often has several developer invoices in dispute or on extended terms when the books close. Left there, each one quietly drops out of the claim. The fix is rarely dramatic: clear the genuine ones before you file, flag the disputed ones so nobody claims them by mistake, and keep the payment dates with the invoices.
What if the developer's company is connected to ours?
If the developer bills you through a company that is connected to yours, say a founder's personal company or a sister company in the same group, you cannot simply claim the invoice. You claim the lower of what you paid and the contractor's own relevant expenditure on the work, and the contractor has to bring the whole of that expenditure into account under normal accounting rules. HMRC's guidance on contractor payments under the reformed reliefs sets out how the connected and unconnected cases differ.
This stops a connected invoice being marked up to inflate a claim, and it means a connected developer company billing you 60,000 pounds but with only 40,000 pounds of its own relevant costs limits your claim to the 40,000 pounds. Two unconnected parties can jointly elect to be treated as connected, in writing, within two years of the end of the period in which the contract was entered into, which occasionally helps where the contractor's underlying costs exceed the 65 percent an unconnected claim would give. The election is irreversible and applies to everything under that contract, so it is a decision to make deliberately rather than at the last minute.
Does the merged R&D scheme change this?
The payment condition is the same under the current rules as it was before, so the answer does not change: pay before you claim. What has changed is the scheme the claim runs through. For accounting periods beginning on or after 1 April 2024, most companies claim through the merged R&D expenditure credit scheme, a taxable 20 percent credit on qualifying spend. A loss-making company whose qualifying R&D is at least 30 percent of its total expenditure can instead use enhanced R&D intensive support, which gives an extra 86 percent deduction and a payable credit worth up to 14.5 percent of the surrenderable loss.
For a software company with payroll and a real development team, the practical point is that the newer, more generous intensive route still only counts costs you have paid. Whichever scheme you are in, an unpaid developer invoice is outside the claim until it is settled, so the timing discipline matters just as much now as it did under the old SME scheme.
Here is how the three common ways of handling an unpaid developer cost in an R&D claim actually compare:
| What the claim needs | DIY / claim software | Generic accountant | LOYALS specialist |
|---|---|---|---|
| Checks each cost is paid before the claim is filed | ✗ You assume | ● If flagged | ✓ Reconciled to the bank |
| Splits the cost correctly as staff, agency worker or contractor | ✗ | ● | ✓ 65 percent rule applied |
| Tests whether the developer company is connected | ✗ | ● | ✓ And whether an election helps |
| Keeps the invoice, payment date and accounts treatment together | ✗ | ● Extra fees | ✓ Built into the claim file |
| Decides whether to carry a disputed invoice to next year | ✗ | ● | ✓ Modelled both ways |
This is why software companies with contractor-heavy claims move from generic filing to a specialist who ties every claimed cost back to a payment.
What to check before you put the invoice in your claim
The decision in front of you is narrow: does this developer invoice go in this year's claim, next year's, or nowhere. Work through the checklist below against each outstanding invoice before you file, and the answer usually falls out on its own.
Unpaid R&D cost eligibility checklist
- ✓Is the invoice for genuine R&D your company decided on and planned, not routine support or maintenance?
- ✓Has it been paid? If not, it cannot go in the claim until it is, so decide whether to pay before you file.
- ✓Is the developer an employee, an agency worker or a contractor company? Apply the full cost, or 65 percent, accordingly.
- ✓Is the contractor connected to you? If so, claim the lower of the payment and their own relevant costs.
- ✓Was the work done in the UK? Overseas development is restricted, with limited exceptions.
- ✓For employed developers, was the pay settled within nine months of the balance sheet date?
- ✓Have you kept the invoice, the proof of payment and the contract together for the claim file?
Most of these are quick to answer once the invoices are in front of you. The one that costs companies money is the second, because a claim prepared from the accounts rather than the bank will quietly include costs that were never paid in time. A claim built the other way round, from what actually left the account, does not have that problem.
If an unpaid invoice is the thing holding up your claim, that is usually the moment a software company stops filing R&D on its own. A looming filing deadline, an HMRC enquiry into last year's claim, or a finance person leaving mid-project are the common triggers, and each is easier handled before the claim goes in than after. This guide is written by LOYALS, a King's Cross firm of accountants and business consultants that prepares and defends R&D claims, corporation tax and company accounts for software companies across London, and our tax planning and advisory team can review your project payments and confirm the treatment before you file. Ask us to check the project payments and confirm the company tax treatment, and you file a claim that stands up.