UK R&D tax changes: unlocking cashflow for life sciences businesses

Innovation sits at the heart of the UK life sciences sector, yet the financial burden of developing, testing and scaling new technologies continues to intensify. 

The preparation of R&D tax claims is much more than a compliance exercise: for many life sciences businesses, it is a critical source of funding that can directly influence cash flow and investment decisions. For PE‑backed life sciences businesses in particular, R&D tax relief could be part of their investment strategy, acting as a non‑dilutive funding lever that reduces equity investment requirements, preserves ownership positions and supports enterprise value at exit. 

Yet the ability to unlock this value has become more complex. Recent changes to the UK R&D tax regime, including the introduction of the R&D Expenditure Credit (RDEC) Merged Scheme and Enhanced R&D Intensive Support (ERIS) scheme, have materially shifted the rules governing which company is the correct claimant and the eligibility of overseas expenditure. 

Contracted‑out R&D: a fundamental shift 

Under the new rules, where R&D is carried out under a contract between parties, the entitlement to claim will now typically sit with the customer - the party that decided to undertake that type of R&D when the contract was entered into. Previously, it was the contractor who could claim these costs. This shift has led to material impacts, both positive and negative, on life science claims. 

The key question is now simple but decisive: Did the customer intend or contemplate that R&D activity of that sort would take place? To answer this, HMRC assesses a range of factors including which party originally initiated R&D, bears financial risk, owns the resulting IP and retains decision making control. 

Expansion of R&D claim scope for life sciences businesses 

The new rules create a significant opportunity for life sciences companies that initiate, fund and control development programmes to claim a broader range of third-party costs. This is particularly relevant to pharmaceutical and biotechnology companies where R&D is delivered through contracted-out models, involving Contract Research Organisations (CROs) and Contract Development and Manufacturing Organisations (CDMOs). 

Where eligibility is clearly evidenced, we are seeing significant uplifts in R&D claim values for life sciences companies; for example, we’ve helped a UK headquartered pharmaceutical company double its R&D claim and supported a global biotechnology company to evidence a threefold increase in qualifying CRO costs. These changes are particularly attractive for PE backed groups with R&D intensive, outsourced models. 

Growing Constraints on CROs and service providers

For CROs, CDMOs and other service‑led businesses, the impact is now the opposite. Where R&D is intended by the customer, and the CRO acts primarily as a delivery partner, entitlement to R&D relief is increasingly limited, restricting claims that were historically possible. Eligibility may still arise in certain circumstances, for example, where the customer is a non-UK tax‑paying entity; we can support in evidencing this. PE houses with CRO‑heavy portfolios may look to reassess the R&D tax assumptions at both portfolio and asset level, particularly where historic value relied on contractor‑led claims. 

How this affects you 

HMRC is scrutinising long‑standing contracted-out R&D models more closely, particularly where activity is delivered through complex CROs, specialist labs and CDMOs. In these arrangements, entitlement is not always a clear-cut exercise and requires careful consideration of the contractual terms and surrounding circumstances. Where scientific direction, IP ownership and financial risk are split across parties, attribution is rarely straightforward. HMRC is placing increasing emphasis on commercial substance and actual control, rather than contractual wording alone. 

Therefore, contract terms and operating arrangements are coming under greater scrutiny, with procurement and legal teams playing a crucial role in shaping R&D‑heavy agreements. CROs may look to reassess pricing models as the loss of R&D relief will significantly impact margins. Robust evidence demonstrating who initiated, controlled and bared the risk for the R&D is now critical. Previous positions cannot be assumed: for some businesses, the changes present upside, while for others they expose risk; therefore, a structured review is essential to determine entitlement. 

Overseas expenditure restrictions and exemptions 

Payments to third parties now qualify only if their R&D work is done in the UK, unless specific exceptions apply. Whilst this initially appears restrictive, the life sciences sector is one of the few where the exceptions are broadly applicable, meaning many companies may see a significant uplift in their claim values. Many development programmes rely on global CROs to run trials overseas where patient populations, site availability or regulatory requirements exists and where UK delivery is impractical or impossible. In practice, the greatest cash impact often sits in these clinical trial management costs, which are typically among the largest line items in an R&D claim. 

For example, our review of two CRO agreements for large-scale international clinical trials worth over $200 million for a UK biotechnology company identified substantial overseas clinical trial management activity that could not reasonably be undertaken in the UK, supporting overseas exemption eligibility, tripling qualifying R&D spend by bringing a significantly broader range of overseas CRO. 

Often, overseas contracted out activity and the provision of EPWs are typically where we see both risk and missed opportunity; some businesses exclude it entirely out of caution, while others may claim such costs without proper supporting evidence. Overseas activities may be substantiated with project plans, regulatory communications, trial design choices, and contracts to show that the necessary conditions could not reasonably be replicated in the UK. The new rules emphasise the importance of contemporaneous documentation, with HMRC focused on real‑time R&D decision‑making. 

Common risks and pitfalls 

In life sciences arrangements, risk often centers around common themes:  

• Mischaracterising the contracted-out delivery model, resulting in EPW and services costs being incorrectly categorised.
• Weak evidence of ‘intended or contemplated’ R&D at contract stage, often due to generic or misaligned MSAs, SOWs or invoices.
• Fully remote overseas costs face heightened HMRC scrutiny where work could plausibly have been done in the UK. Claims require clear evidence that knowledge, management or regulatory requirements were genuinely location‑specific and could not be transferred.
• Inaccurate apportionment of costs between activities undertaken in the UK, overseas, and remotely poses a significant risk.

Conclusion 

We work with life sciences businesses at the intersection of Innovation Tax and cash‑flow strategy, helping them navigate the re‑shaped R&D landscape with a focus on both value and defensibility. Under the revised rules, the focus is on accessing optimised tax benefits with confidence across increasingly complex development and delivery models.   

For guidance, get in touch with Antoinette Quinlan and Sophie Edwards.