August 12, 2025 HMRC, AI, and R&D tax relief
Research and Development (R&D) tax relief is designed to provide extra support to innovative companies in the fields of science and technology. Only projects which directly contribute towards achieving advances in science or technology can qualify and there are strict rules on whether projects might be eligible for the relief. For example, although as HMRC’s “Corporate Intangibles Research and Development Manual ” sets out, the outcome of the research could be either tangible or intangible; the results have to benefit overall knowledge or capability, not just that of the individual organisation.
The rules on the type of expenses which can be legitimately associated with an R&D project are also fairly complex. For example, whilst salaries and associated salary costs such as pensions and National Insurance costs can be included in the calculation, they have to be directly linked to the relevant project on a time-basis. That means that if an employee works part time on the R&D project and part time within other areas of the organisation, their costs have to be allocated accordingly.
R&D tax relief has hit the headlines in recent times thanks to a first tier tax tribunal decision on 2 August 2025. The case centered on an earlier HMRC decision to neither confirm nor deny whether AI was being used within HMRC’s R&D Tax Credits Compliance Team. The decision, which was supported by the Information Commissioner, was originally made in 2024 in respect of a freedom of information request.
The tribunal found that HMRC’s failure to confirm or deny the use of AI in dealing with R&D claims undermined taxpayer’s confidence in HMRC’s treatment of claims and that in turn discouraged legitimate claimants from making claims. This, the tribunal found could potentially undermine the policy objectives of the R&D scheme.
As part of the decision-making process the tribunal considered the impact which greater transparency might have on fraudulent claims. However, it concluded that not only were concerns about increased levels of fraud unsubstantiated, the societal benefits of transparency should also be given due weight. HMRC now has until the middle of September to comply with the order for disclosure on the use of AI in R&D reviews.
Elemental’s R&D tax relief advisory service offers both pre-claim reviews and post-claim follow-ups. This includes working with companies to identify potential R&D costings, to quantify them, and to compile a technical report which delivers the level of detail required by HMRC in order to support a claim.
