Key Risks Facing Life Sciences R&D Tax Relief Claims
The UK’s research and development (R&D) tax relief framework continues to play a vital role in supporting life sciences businesses that are pushing the boundaries of innovation. For research‑led organisations, these incentives can be instrumental in sustaining cash flow, extending operational runway, and enabling continued investment in high‑impact scientific progress. However, R&D relief remains one of the most complex and closely scrutinised areas of the tax system.
Recent legislative changes have significantly increased the compliance burden, particularly around the treatment of subcontracted work and overseas R&D activity. HM Revenue & Customs has intensified its focus on these areas, increasing both the likelihood and the complexity of enquiries. The introduction of the new merged RDEC scheme for accounting periods starting on or after 1 April 2024 represents a fundamental shift, reshaping how subcontracted R&D is assessed and changing the commercial dynamics for many claimants. As a result, organisations that rely on R&D tax relief to fund innovation now face a more exacting and nuanced regulatory environment.
Against this backdrop of heightened scrutiny, four common issues consistently emerge as the most significant obstacles to making robust, defensible claims. Identifying these pitfalls and understanding how to mitigate them has become critical for research‑driven businesses seeking to safeguard their entitlement to relief and maintain momentum in their innovation programmes.
1. Misclassifying Non-Qualifying and Indirect Activities
Many life sciences organisations inadvertently include activities that do not meet the definition of qualifying research and development. Routine assays, screening work, quality assurance (QA) and quality control (QC) checks, standard documentation and general project management often sit alongside genuine scientific work, but they do not resolve scientific or technological uncertainty and therefore cannot be claimed.
However, the Department of Science, Innovation, and Technology guidance recognises that some activities may still qualify even if they do not directly resolve the core uncertainty. Under Paragraph 31 of the guidelines, certain indirect activities may be included when they support eligible research and development. These include scientific information services, administrative support tied directly to the research effort, training of research staff and maintenance of laboratory equipment used in qualifying projects.
To prepare a compliant claim, it is important to distinguish between routine operational tasks, which must be excluded, and legitimate indirect support activities, which may be included when they meet the Paragraph 31 criteria. Making this distinction early improves both the technical narrative and the supporting evidence.
2. Technical Narratives That Do Not Meet Expectations
A strong technical narrative is central to a compliant claim, yet many fall short because they are written from a commercial perspective rather than a scientific one. HM Revenue and Customs needs to understand the scientific challenge, why the outcome was not predictable and what experimental steps were taken.
The most robust technical narratives are developed with input from scientific teams who understand the uncertainties encountered. Scientists and engineers should clearly describe the problem, the investigative work carried out and what new knowledge was gained. This strengthens eligibility and reduces the likelihood of follow up questions.
3. Subcontracting: One of the Most Complex Areas for Life Sciences
Subcontracting is a core part of how life sciences companies operate, with regular involvement from contract research organisations, contract development and manufacturing organisations, universities and external laboratories. However, this also makes subcontracted work one of the most complicated areas of research and development tax relief.
Determining who initiated and directed the research, who bore the scientific risk and which elements qualify can be challenging, particularly when responsibilities are shared. The contracting out rules introduced in April 2024 adds further importance to separating scientific activity from regulatory, operational or routine support tasks within blended workstreams.
A compliant claim requires a clear understanding of the contractual relationship, evidence showing who intended or contemplated the research and development and a detailed breakdown of any bundled invoicing to ensure that only qualifying scientific work is included.
4. Overseas Expenditure: Increasingly Difficult to Justify
Life sciences research often depends on clinical trial sites, specialist facilities, patient populations and regulatory frameworks located outside the United Kingdom. However, under the updated rules, overseas expenditure is allowable only where the company can show that the work could not reasonably have been carried out in the United Kingdom for geographical, environmental, social, legal or regulatory reasons.
This is a demanding test. HM Revenue and Customs does not accept justifications based on cost savings, access to expertise or established global processes. As a result, companies must provide clear evidence explaining why the United Kingdom was not a viable option and what specific overseas conditions made the work necessary.
Detailed and well-structured documentation is essential for supporting this category of expenditure.
Positioning Life Sciences Companies for Success Under Evolving R&D Rules
Life sciences organisations operate in a complex and fast-moving environment, where advanced scientific research, regulatory requirements and commercial pressures converge. In this context, preparing a robust research and development tax relief claim requires more than technical accuracy alone. It demands clear articulation of complex activity, supported by strong evidence and sound judgement. Claims that apply the Department of Science, Innovation, and Technology guidelines correctly, present compelling scientific narratives, clearly define subcontracting arrangements and thoroughly document overseas research activity are far better positioned to withstand scrutiny and reduce risk.
As the research and development regime continues to evolve and HM Revenue and Customs applies increasingly rigorous oversight, now is a critical point for research driven organisations to step back and reassess their approach. Ensuring that claims align fully with current legislative and administrative expectations is essential not only to safeguard access to valuable relief, but also to provide a secure foundation for ongoing investment in innovation.
For organisations seeking support that combines scientific depth with tax technical expertise, Frazier & Deeter brings extensive experience across the full research and development process. Our team works closely with life sciences businesses to prepare, review and strengthen claims. To explore your specific challenges or discuss how we can support your organisation, we invite you to connect with our team.
Contributors
Asma Aslam, Tax Senior Manager
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