Pharmaceutical & Life Sciences R&D Tax Credits — Getting the Merged Scheme Right

If your company develops drugs, biologics, medical devices, diagnostics, or therapies, R&D tax relief should be straightforward. In reality, the merged R&D scheme and HMRC’s tightening compliance expectations mean claims must be carefully structured — especially where subcontracting, grants, Patent Box, and capital allowances are also in play.

The relief available is substantial. Getting it right requires advisers who understand both the science and the legislation.

Where Pharma & Life Sciences Claims Go Wrong

Even in a science-heavy sector, HMRC frequently challenges:

• Subcontracted R&D

If you are a CRO then has R&D been subcontracted to you? Are you subcontracting work to the CRO? Under the Merged scheme, the R&D decision-maker gets to claim, but determining whether the commercial arrangement is a contract for services or subcontracted R&D is not always easy.

• Blurring R&D and routine production

Once a drug, device, or diagnostic moves into routine manufacture, production costs stop qualifying. You need a clear, documented point at which development ends and commercial production begins.

• Overclaiming clinical trial costs

Not all clinical trial activity is R&D. Qualifying work typically includes trial design, methodology development, protocol optimisation, data analysis, and resolving scientific uncertainties. Routine site management, patient recruitment logistics, and administrative tasks are usually non-qualifying.

• Misapplying subcontractor rules

Under the merged scheme you can usually only claim 65% of qualifying subcontracted R&D, and the work must generally be UK-based. Overseas CROs, CDMOs, and testing houses are heavily restricted from 1 April 2024, subject to narrow statutory exceptions.

• Ignoring failed or abandoned projects

Shelved drug candidates, failed formulations, and discontinued device programmes can still qualify. R&D relief is based on attempting to resolve scientific or technological uncertainty — not on commercial success.

• Missing supporting activities

Activities that directly contribute to resolving the uncertainty can qualify, even if they are not the core experiment. Examples include analytical method development, building test rigs, and creating bespoke software tools for data processing and modelling.

Typical Qualifying Activities

The following areas commonly involve genuine technological uncertainty under the DSIT Guidelines and CTA 2009 Part 13:

Drug Discovery and Development

• Hit identification and lead optimisation (SAR, iterative compound modification)
• Pre-clinical development where pharmacology, toxicology, or ADME cannot be predicted from first principles
• Formulation screening and stability work for novel compounds

Formulation and Drug Delivery

• Novel formulations targeting specific bioavailability or release profiles
• Overcoming solubility, stability, or delivery challenges for small molecules and biologics
• Development of sustained-release, targeted, or temperature-sensitive systems where standard approaches are inadequate

Biologics and Biosimilars

• Cell line development and upstream/downstream process optimisation
• Viral clearance validation and complex analytical method development
• Biosimilar comparability (analytical, functional, and clinical) where similarity cannot be assumed

Medical Devices

• Biocompatibility and safety/performance optimisation in real-world conditions
• Reliability, durability, and human factors engineering where user–device interaction is uncertain
• Software as a Medical Device (SaMD) where algorithm performance and clinical validation involve unresolved technical challenges

Diagnostics and In Vitro Devices

• Novel assay platforms and improvements in sensitivity/specificity
• Point-of-care and multiplexed systems, including miniaturisation of lab processes
• Biomarker identification and validation where biological behaviour is not fully characterised

Process Development and Scale-Up

• Moving from lab to pilot to commercial scale where process behaviour changes with scale
• Biologics manufacturing (fermentation, purification, fill–finish) and ATMP scale-up
• Novel small-molecule processes (e.g. continuous manufacturing, green chemistry) where scale-dependent effects are uncertain

Advanced Therapy Medicinal Products (ATMPs)

• Gene and cell therapy manufacturing consistency and potency characterisation
• Quality control and stability of living products
• Novel analytical and release strategies for ATMPs

Regulatory Science

• Developing or significantly adapting scientific methodologies to support regulatory submissions (e.g. ATMP classification, orphan designation, novel excipient safety)
• Note: routine regulatory administration and dossier compilation is not R&D.

The Merged R&D Scheme (From 1 April 2024)

For accounting periods starting on or after 1 April 2024, pharma and life sciences companies claim under the merged R&D Expenditure Credit (RDEC-style) scheme:

• Credit rate: 20% of qualifying R&D expenditure
• Typical net benefit: ~15p per £1 after 25% Corporation Tax
• Illustration: £1,000,000 qualifying R&D → c. £150,000 net benefit

ERIS — Enhanced R&D Intensive Support

For loss-making companies where qualifying R&D is ≥30% of total expenditure, ERIS offers a payable credit of up to 27% of qualifying R&D costs.

This is particularly relevant for:

• Pre-revenue biotech and pharma companies
• Clinical-stage companies with high trial and development spend
• Medical device and diagnostics startups
• Gene therapy and ATMP developers

Example:

£2,000,000 qualifying R&D spend in an R&D-intensive, loss-making company could generate a cash credit of up to £540,000, directly supporting runway and further development.

Qualifying Cost Categories

You can typically include:

• Staff costs

Salaries, employer NIC, and pensions for:

• Scientists, researchers, formulation chemists, process engineers
• Clinical research staff, to the extent they are resolving scientific uncertainty
• Regulatory scientists developing scientific evidence (not routine paperwork)
• QA/QC staff involved in method development and validation
• Technicians directly supporting qualifying R&D
• Subcontractors
• UK-based CROs, CDMOs, testing labs, and specialist consultants performing R&D under your direction
• Claimable at 65% of invoiced cost, subject to merged scheme rules
• Externally provided workers (EPWs)
• Agency scientists, secondees, and interim specialists
• Generally claimable at 65% of staffing cost where they are engaged in qualifying R&D
• Consumables
• Reagents, chemicals, biological materials, cell culture media
• Laboratory consumables, reference standards, and materials consumed or transformed in R&D
• Excludes consumables used in routine commercial production
• Software
• LIMS, ELNs, statistical packages, molecular modelling, PK/PD tools
• Any software used directly in R&D activities
• Cloud computing and data (from 1 April 2023)
• Computational chemistry, genomics and bioinformatics processing
• Clinical data analysis, AI/ML model training and validation used in R&D
• Clinical trial costs
• To the extent they relate to resolving scientific uncertainty (design, methodology, analysis), not routine administration.

Overseas Restrictions

From 1 April 2024, subcontracted R&D and EPWs must generally be UK-based to qualify. This affects companies that:

• Run clinical trials primarily through overseas CROs
• Use offshore CDMOs for process development or manufacture
• Rely on international testing laboratories

Only narrow statutory exceptions apply (e.g. where specific conditions or populations cannot reasonably be replicated in the UK). The default position is that overseas costs are excluded, so planning and structuring of contracts and trial locations is critical.

Patent Box Interaction

Where you hold qualifying patents, the Patent Box regime can reduce the effective Corporation Tax rate on relevant profits to 10%.

R&D tax relief and Patent Box are complementary:

• R&D relief: optimises the cost side (development expenditure)
• Patent Box: optimises the profit side (income from patented innovations)

However, the calculations interact and must be coordinated to avoid double counting and to maximise overall benefit.

HMRC’s Expectations for Pharma & Life Sciences Claims

HMRC’s life sciences specialists are technically literate and expect:

• Clear R&D vs production boundaries

Document when development ended and routine manufacture began for each product or process.

• Robust cost allocation
• Time apportionment for staff working across R&D and non-R&D (e.g. routine QC, batch release)
• Transparent methodologies backed by time records, project codes, or other contemporaneous evidence
• Accurate grant mapping
• Identification of notified state aid grants (e.g. Innovate UK, Horizon, NIHR)
• Exclusion of grant-funded expenditure from the merged scheme claim where required
• Contemporaneous technical evidence
• Lab notebooks and ELNs
• Study reports, protocols, validation reports
• Project plans and decision logs
• High-quality technical narratives

Narratives should:

• Explain the scientific or technological uncertainties
• Set out the baseline of existing knowledge and why it was insufficient
• Describe the systematic work undertaken and the advance sought
• Use language and detail appropriate for a technically informed HMRC reviewer

How Innovation Plus Supports Pharma & Life Sciences Companies

We recognise that pharma and life sciences R&D is complex, multi-year, and often funded from multiple sources. Our support typically includes:

• Deep scientific engagement

Working directly with your scientists, clinicians, and technical leads to identify genuine technological uncertainties and map them to the DSIT Guidelines.

• Merged scheme and ERIS expertise

Interpreting the new rules on subcontractors, overseas expenditure, and R&D intensity, and aligning them with your grant funding, Patent Box position, and capital allowances.

• Robust claim preparation
• Technical narratives drafted in the language HMRC expects
• Clear referencing to CTA 2009 Part 13, DSIT Guidelines, and relevant CIRD guidance
• Structured cost schedules that reconcile to your accounts and project records
• Multi-year project tracking

Ensuring long-running programmes are captured consistently across accounting periods, with clear treatment of phase transitions (pre-clinical, clinical, scale-up, commercialisation).

• Enquiry defence

Engaging with HMRC’s life sciences specialists on equal scientific footing, addressing both technical and fiscal points.

We have been preparing R&D claims since 2009. For most pharma and life sciences companies, the key question is not whether you qualify, but whether your claim:

• Captures all eligible projects and costs
• Correctly handles grants, subcontractors, and overseas work
• Is robust enough to withstand HMRC scrutiny

Get a comprehensive review of your pharma or life sciences R&D claim →

Pharma R&D Tax Credits: Are You Leaving Money (and Risk) on the Table?

If you're a pharma, biotech, or life sciences company, you are almost certainly doing qualifying R&D — often at a scale that makes R&D tax relief one of your most valuable funding streams.

The challenge isn’t whether you qualify. It’s whether:

• You’re capturing all eligible activities and costs (including the ones most often missed), and
• Your claim is structured to withstand HMRC’s rising compliance scrutiny under the merged scheme and ERIS rules.

At Innovation Plus, we specialise in pharma and life sciences R&D claims. We combine:

• Deep scientific understanding – drug discovery, formulation, clinical development, devices, analytics, regulatory and quality science
• In‑depth tax and legislative expertise – merged scheme mechanics, ERIS, overseas restrictions, and HMRC’s latest guidance

so your claim is both maximised and defensible.

Where Pharma Companies Commonly Under‑Claim

Even highly R&D‑intensive businesses often miss substantial value by excluding:

• Analytical method development – bespoke or significantly adapted HPLC, LC‑MS, bioassays, dissolution methods where standard pharmacopoeial methods don’t work
• Regulatory science – generating novel data packages and evidence for regulatory classifications or approvals where no established route exists
• Quality and manufacturing science – work to understand critical process parameters, implement PAT, or resolve complex deviations involving genuine scientific uncertainty
• Failed and abandoned projects – shelved candidates, failed formulations, or devices that never reach market still qualify where they involved scientific/technological uncertainty
• Supporting and enabling activities – literature reviews, data analysis, experimental planning, and R&D administration that are directly related to qualifying projects
• IT, software, and data science – bespoke tools, algorithms, and platforms developed to overcome technological uncertainty in discovery, development, or diagnostics

We map these activities explicitly to the DSIT Guidelines and HMRC’s CIRD manual, so they are clearly within scope rather than “nice to have” extras.

Navigating the Merged Scheme and ERIS (From 1 April 2024)

Under the merged R&D scheme, most pharma and biotech companies will see:

• A 20% credit rate on qualifying R&D spend
• A typical net benefit of ~15p per £1 after 25% Corporation Tax