The medical and pharmaceutical sectors are strong candidates for UK R&D tax relief, but the rules around claiming it have tightened significantly. Under the merged scheme, businesses need to pay closer attention to how they evidence their projects and costs, particularly in relation to documentation, clinical trials, overseas activity, and subcontracted R&D.

In this article, we look at each of these areas and highlight the practical considerations for businesses preparing a claim.

Getting record-keeping right

HMRC now expects more detailed evidence for R&D claims than ever before, with businesses having to show contemporaneous evidence of the R&D project. Your development team will be heavily involved in the work itself, and record keeping can easily become a second thought as the work progresses. However, failing to include sufficient detail can lead to HMRC queries or even claim refusal.

Maintaining clear contemporaneous records of R&D activities, such as project plans, lab notes, trial protocols, and technical reports, is therefore essential to a successful claim. In addition to these project records, HMRC will also expect to see evidence that ties expenditure, such as staff timesheets or invoices for materials, to specific R&D projects. This means businesses should be thinking about their R&D claim throughout the year instead of rushing to pull everything together after the year end when the claim is being prepared.

With HMRC’s current compliance focus, strong documentation is one of the best ways to support and defend a claim, while making the preparation process more efficient.

Clinical trials: Eligible costs & qualifying phases

Clinical trials are central to medical and pharma R&D, and trial-related work often qualifies for R&D relief - but there are important nuances to consider.

Trial stages

Under HMRC’s guidance, Phase I, II, and III trials (from first-in-human through to pre-market efficacy studies) usually count as R&D, since they aim to resolve scientific uncertainties about a new drug’s safety or effectiveness. In contrast, Phase IV trials (conducted post-licensing, mainly for long-term monitoring or marketing purposes) are generally not considered R&D.

However, if scientific questions are still being investigated in Phase IV, rather than the work being limited to commercial or efficacy monitoring, it might still be possible to claim. Businesses should therefore take care to exclude purely post-approval compliance studies or routine monitoring from their R&D claims.

Volunteer costs

A unique feature in this sector is that payments to clinical trial volunteers can qualify as R&D expenditure, but they must still be properly identified and supported within the wider claim.

Qualifying vs. non-qualifying activities

Even within Phases I-III, not every activity will qualify as R&D. Routine regulatory and commercial tasks during trials must be excluded. For example, developing a novel assay or data analysis method to measure trial outcomes may qualify, but branding work, market research, or standard quality testing during a trial would not.

In summary, medical and pharmaceutical companies are often well placed to identify genuine R&D within their clinical development programmes, but they must still delineate which activities qualify. By focusing claims on the experimental and innovative aspects, and excluding late-stage marketing or purely regulatory compliance work, businesses can satisfy HMRC’s requirements and avoid pitfalls.

Overseas R&D restrictions

The UK government introduced a major change affecting R&D carried out overseas. For accounting periods starting on or after 1 April 2024, certain overseas R&D costs will no longer be eligible for relief unless specific conditions are met.

In general, expenditure on subcontracted R&D or externally provided workers (EPWs) now only qualifies for relief if the R&D activities occur within the UK. This is particularly relevant for medical and pharmaceutical sector businesses, where it is common to have R&D work carried out abroad, for instance, clinical trials at overseas sites, or by using technical specialists overseas.

These costs cannot be claimed unless you can demonstrate that the R&D could not reasonably have been undertaken in the UK and that the relevant requirements to apply for an exemption have been met. The legislation is complex and the guidance from HMRC includes a wide range of examples, so businesses should seek advice before including overseas costs.

What might qualify as an exception? HMRC gives examples such as: access to a specific patient population (e.g. a tropical disease trial where patients are abroad), unique environmental or geological factors, or a regulatory requirement for the work to take place in a certain country. Essentially, if the nature of the R&D itself dictates an overseas location, you can potentially still claim those costs. On the other hand, cost savings or a lack of availability of workers would not, on their own, be enough.

Many pharma and biotech companies operate internationally, so this change could have a significant impact on future claims. Businesses should plan early to identify any R&D activities currently conducted overseas and, where possible, consider bringing work back to the UK or clearly documenting why it must be abroad.

The new UK focus means companies may need to revisit R&D collaborations and supply chains. Some overseas R&D spend might need to be reallocated or excluded from claims to stay compliant. Any costs included under an exception should be supported by clear evidence articulating the necessity of overseas work.

New merged scheme subcontracting rules

Alongside the merged R&D scheme, the rules on subcontracted R&D have been overhauled. This affects who can claim when R&D is performed by one party for another:

If you outsource R&D:

Under the new merged scheme (applicable for periods from April 2024), the company that commissions and pays for R&D will generally be entitled to claim the relief, even if the work is done by another firm. This is a positive change for companies who previously claimed under the large company RDEC scheme. SMEs remain able to claim outsourced R&D costs in a similar way to before. Businesses should factor these outsourced project costs into future claims as this can significantly increase the available benefit.

If you are performing R&D for clients:

A company hired to carry out R&D for someone else usually cannot claim relief on that work, since the customer is generally entitled to claim. In other words, if your pharma or biotech company is acting as a contractor carrying out R&D under direction for a UK client, you will not usually be eligible to claim that expenditure because the tax credit belongs to the company funding the project.

Exceptions exist:

If the client is not eligible for UK R&D relief, for example, a foreign company, or a charity/university, it may still be possible to claim. But generally, the new rules seek to ensure only one-party claims, with priority given to the entity taking the financial risk and specifying the R&D. This means R&D service providers and CROs need to be aware that their UK clients will often be the ones to claim relief, and they should take care to not double claim those same costs. If you’re performing R&D for someone else, it is worth consulting about how these rules might apply to you and what impact they might have on your R&D claim.

Next steps

If your organisation is navigating the evolving R&D tax relief landscape our team can help. Whether you're refining your documentation, assessing overseas activity, or reviewing subcontracting arrangements, we offer practical, sector-specific support to ensure your claims are accurate, compliant and optimised. Get in touch with our R&D tax specialists via the form below to discuss your next claim.