Key Points
Most digital and creative agencies assume R&D tax credits are for laboratories and pharmaceutical companies. They are wrong. Custom web development, proprietary automation tools, and complex technical integrations can all qualify.
The result? Agencies leave £10,000 to £50,000 or more on the table every year. HMRC data shows the Information & Communication sector (which includes digital agencies) accounts for a significant share of all R&D claims. If you are building custom technology, you should be claiming.
This guide explains exactly what agency work qualifies, how much you can claim under the merged RDEC scheme from April 2024, the claim process, and the mistakes that get claims rejected. Whether you are a web development shop, PPC agency with proprietary bidding tools, or creative studio building custom CMS solutions, this is for you.
What Are R&D Tax Credits? (For Agencies)
R&D tax credits are a UK government incentive that rewards companies for investing in innovation. You get money back from HMRC for qualifying research and development work. The aim is to encourage UK businesses to push technological boundaries.
From April 2024, the old SME R&D scheme and RDEC scheme merged into a single merged RDEC scheme. This applies to all companies regardless of size. The credit rate is 20% of qualifying expenditure, which delivers an effective cash benefit of around 15% for profitable companies after Corporation Tax.
Why Agencies Think They Do Not Qualify
The Key Distinction: Creative vs Technical Innovation
R&D tax relief requires technological advancement, not creative or aesthetic advancement. A beautiful new brand identity? Not R&D. A novel caching system that delivers sub-100ms page loads for a site with 50 million monthly visitors? That could qualify.
The test is whether a competent professional in the relevant field could easily work out how to achieve the outcome. If your senior developers genuinely had to experiment, research, and iterate because the solution was not straightforward, that is the hallmark of R&D.
What Agency Work Qualifies for R&D Tax Credits?
Not all development work qualifies. HMRC applies a strict test: the work must seek to achieve an advance in overall knowledge or capability in a field of science or technology, through the resolution of scientific or technological uncertainty.
Custom Web/App Development
OFTEN QUALIFIESBespoke applications solving novel technical problems
Building custom applications where standard solutions do not exist or cannot meet requirements. Examples:
- Custom e-commerce platform with novel inventory management algorithms
- Real-time collaboration tools requiring complex state synchronisation
- Progressive web apps with offline-first architecture and novel caching strategies
- Headless CMS implementations with custom rendering pipelines
Proprietary Tools and Automation
OFTEN QUALIFIESInternal tools that advance your agency's capabilities
Building in-house tools that give your agency competitive advantage through technical innovation:
- Custom bid management systems for PPC using machine learning algorithms
- Automated reporting dashboards with novel data aggregation pipelines
- AI-powered content generation tools with custom training approaches
- Project management software with industry-specific workflow automation
Complex Integration Work
Connecting platforms in ways that required technical innovation
Integration projects where existing connectors or methods did not exist or were inadequate:
- Custom middleware connecting legacy enterprise systems with modern APIs
- Real-time data synchronisation between platforms with conflicting data models
- Bespoke payment gateway integrations with novel security implementations
Performance Optimisation
Achieving performance beyond current industry standards
Work to achieve performance levels that standard approaches cannot deliver:
- Novel server-side rendering approaches for sub-second page loads at massive scale
- Custom image optimisation pipelines beyond existing tooling capabilities
- Database query optimisation requiring novel indexing strategies
Accessibility Innovation
Technical advances in making products accessible
Developing novel technical solutions to accessibility challenges, such as custom screen reader implementations, innovative keyboard navigation systems, or new approaches to making complex interactive content accessible where existing techniques were insufficient.
What Does NOT Qualify
Not sure if your work qualifies? We help agencies identify qualifying R&D and prepare compliant claims. Many agencies we work with are surprised by how much of their development work meets the criteria.
Book a free R&D assessment callQualifying Expenditure Categories
Once you identify qualifying R&D projects, you need to calculate the qualifying expenditure. Not all costs count.
Staff Costs
The biggest category for most agencies. Includes:
Calculate the percentage of each person's time spent on qualifying R&D projects. A developer spending 40% of their time on R&D projects means 40% of their total employment cost qualifies.
Subcontractor Costs
Under the merged RDEC scheme from April 2024:
The subcontractor rules changed significantly in April 2024. Generally, the company that commissions and funds the R&D claims the credit, not the company that performs it. Check the specific arrangements for your contracts.
Software and Cloud Computing
Software costs used directly and actively for R&D:
Only the portion directly used for R&D counts. General business software like Slack or Xero does not qualify.
Consumables
Materials consumed or transformed by the R&D process. For digital agencies this is typically minimal but can include specialist hardware components used in prototyping, materials for physical testing of IoT devices, and similar.
How Much Can You Claim? Worked Examples
Under the merged RDEC scheme from April 2024, the credit rate is 20% of qualifying expenditure. For profitable companies paying Corporation Tax at 25%, the effective cash benefit is around 15%(the credit is taxable income, so £20 credit minus £5 tax = £15 net benefit per £100 spend).
Use our free R&D tax credit calculator to estimate your potential claim based on your agency's specific situation.
Example 1: Web Development Agency
A 15-person agency with 6 developers spending approximately 30% of their time on qualifying custom development work.
Example 2: PPC Agency with Proprietary Bidding Tool
An 8-person PPC agency that built a custom machine learning bidding system over 12 months.
Example 3: Creative Studio with Custom CMS
A 20-person creative studio that developed a bespoke headless CMS for clients with complex content workflows.
The R&D Tax Credit Claim Process
R&D tax credits are claimed through your Corporation Tax return. Here is the process step by step.
Identify Qualifying Projects
Review your projects from the accounting period. Which ones involved technological uncertainty that a competent professional could not easily resolve? Document the specific technical challenges you faced.
Calculate Qualifying Expenditure
For each qualifying project, calculate the staff costs (with R&D time percentages), subcontractor costs, software and cloud costs. You need records to support these figures.
Prepare Technical Narrative
Write a technical report explaining what advance you sought, what uncertainty existed, why a competent professional could not easily resolve it, and how you attempted to overcome it. This is the heart of your claim.
Complete Additional Information Form (AIF)
Since April 2023, all R&D claims must include an Additional Information Form submitted through HMRC's online portal. This includes project descriptions, qualifying expenditure breakdown, and a named senior officer sign-off.
File CT600 with R&D Claim
Include the R&D claim in your Corporation Tax return (CT600). The RDEC credit appears as taxable income with a corresponding tax credit. HMRC typically processes claims within 28 days for straightforward cases.
2026 Changes: What Is New
The R&D tax landscape has changed significantly and continues to evolve. Here are the key developments affecting agencies.
Merged RDEC Scheme (From April 2024)
The old SME R&D scheme and RDEC merged into a single scheme for accounting periods starting from 1 April 2024. The 20% credit rate applies to all companies. Loss-making R&D-intensive companies (30%+ of costs on R&D) can access the Enhanced R&D Intensive Support (ERIS) scheme with higher effective rates.
Advance Assurance Pilot (Spring 2026)
HMRC is introducing an Advance Assurance service that gives smaller businesses upfront guidance on whether their innovation projects qualify for R&D relief. This reduces uncertainty and compliance risk. Details on eligibility and application process are expected in early 2026.
Enhanced Compliance Requirements
HMRC has significantly increased compliance activity. The Additional Information Form requires detailed project descriptions, a breakdown of costs by category, and sign-off by a named senior company officer. Claims are scrutinised more closely. Agencies must keep robust contemporaneous records to support claims.
Overseas Expenditure Restrictions
R&D activities carried out overseas generally no longer qualify, with limited exceptions. Work done by overseas subcontractors or externally provided workers based outside the UK is excluded unless specific conditions apply (such as it being wholly unreasonable to carry out the work in the UK due to geographic or legal factors).
Common Mistakes Agencies Make
Claiming creative work as R&D
Design, branding, UX, and marketing campaigns are not R&D no matter how innovative they are creatively. R&D requires technological advancement. HMRC rejects claims that conflate creative and technical innovation.
Missing subcontractor costs
Many agencies forget to include qualifying subcontractor costs in their claims. Under the merged scheme, 65% of connected party subcontractor costs qualify. Make sure your R&D review includes all external technical resources.
Poor documentation
Without contemporaneous records showing the technical uncertainty you faced, HMRC may reject your claim during a compliance check. Keep project documentation, time tracking data, technical specifications, and records of approaches tried and failed.
Not claiming in time
You can only claim for the current accounting period plus the previous two years. Agencies that delay reviewing their R&D lose money. A project from 2022 may already be time-barred. Review your qualifying work promptly.
Assuming client work cannot qualify
Whether client-funded work qualifies depends on who owns the IP and bears the financial risk, not simply who paid the invoice. If your agency retains IP rights and bears technical risk, you may be able to claim. Get proper advice on your specific arrangements.
Overclaiming routine development
Not all technical work is R&D. Building a standard website, configuring a CMS, or implementing well-documented features does not qualify simply because developers did the work. The uncertainty test is strict. Overclaiming triggers HMRC enquiries and clawbacks.
Frequently Asked Questions
Can digital agencies claim R&D tax credits?
Yes. Digital agencies can claim R&D tax credits for work that seeks to achieve an advance in science or technology by overcoming technical uncertainty. Custom web application development, proprietary tools, bespoke integrations, and performance optimisation work often qualify. The key test is whether a competent professional in the field could not easily work out the solution. Routine website builds, design work, and standard CMS implementations do not qualify.
What is the difference between R&D and regular development work?
R&D work must seek an advance in overall knowledge or capability in a field of science or technology through resolving scientific or technological uncertainty. Regular development uses existing knowledge to build known solutions. Building a standard WordPress site is not R&D. Building a custom headless CMS with novel caching architecture to handle 10 million daily visitors when existing solutions could not meet requirements may qualify.
How much can agencies claim through R&D tax credits?
Under the merged RDEC scheme from April 2024, the credit rate is 20% of qualifying expenditure. After Corporation Tax at 25%, profitable companies receive an effective benefit of around 15% (15p for every £1 of qualifying spend). For an agency spending £100,000 on qualifying R&D, the cash benefit is typically £15,000 to £16,200.
Can I claim R&D tax credits if the client paid for the work?
It depends on who bears the financial risk and owns the intellectual property. Under the merged RDEC scheme, the company that commissions R&D is generally the one that claims. However, if your agency retains IP rights, bears the risk of project failure, and the work advances your own capabilities, you may still be able to claim. The contract terms matter significantly.
How far back can I claim R&D tax credits?
You can claim R&D tax credits for the current accounting period plus the previous two years. If your accounting period ends 31 March 2026, you can still claim for periods ending 31 March 2024 and later. Review your past projects promptly before the deadline passes.
Do I need to apply before starting R&D work?
No. R&D tax credits are claimed retrospectively after the work is done through your Corporation Tax return. However, from spring 2026, HMRC is introducing an Advance Assurance pilot for smaller businesses. Good record-keeping from the start makes claims much easier.
What records do I need for an R&D tax credit claim?
You need contemporaneous project records showing the technological uncertainty you faced, approaches tried, and how you resolved it. Keep timesheets showing staff hours on R&D projects, invoices for subcontractors and software, and technical documentation. Project management tools like Jira or Asana provide useful evidence.
Can small agencies claim R&D tax credits?
Yes. There is no minimum company size or minimum R&D spend. A two-person agency spending £20,000 on qualifying R&D can claim just as validly as a 50-person agency. The merged RDEC scheme applies equally to all company sizes from April 2024.
What if HMRC investigates my R&D claim?
HMRC compliance checks have increased significantly. If investigated, you must demonstrate that your work meets the technical uncertainty test and that your expenditure calculations are accurate. Claims prepared with proper evidence rarely fail enquiries. Working with an experienced R&D adviser reduces enquiry risk.
Can I claim R&D tax credits for failed projects?
Yes. R&D does not require success. If you attempted to overcome a technological uncertainty and the project failed, the qualifying expenditure is still claimable. Failed projects often demonstrate genuine uncertainty more clearly than successful ones.
Related Reading
R&D Tax Credit Calculator
Estimate your potential R&D claim in minutes
How to Pay Yourself from a Limited Company
5 tax-efficient methods for UK directors
Tax Deductions for Freelancers UK
Complete list of allowable expenses
Optimal Director Salary 2026/27
Tax-efficient salary and dividend strategies
Pension Contributions for Directors
The most tax-efficient way to extract profit
Accounting for Agencies
How we help digital and creative agencies
Found this helpful? Share it: