AI Software Startups & R&D Tax Credits

If you're a software company using Artificial Intelligence (AI) in your startup, you might assume you're eligible for R&D tax credits. After all, AI software product is cutting-edge, complex, and innovative, right?

Unfortunately, HMRC doesn’t see it that way.

In the past, getting R&D tax relief for software projects and AI development was relatively straightforward. But now, the rules are tighter, and many AI startups are seeing their claims rejected—even after receiving payouts from tax credits in previous years.

Here’s Why:

❌ Just using AI isn’t enough. If your product is powered by AI models like GPT, Anthropic, Stable Diffusion, Llama or other pre-existing frameworks, HMRC will likely argue that your software developers are applying AI, not innovating in AI.

❌ Your work must solve "technological uncertainty.” If a competent professional (read: AI or software engineer) could achieve the same result using known techniques, it’s not R&D (even if it feels like innovation from a business perspective). The role of competent professionals is now crucial for R&D success, especially for software development projects.

❌ Rate of development - Barely a day goes by when there isn't some breakthrough in AI technology. You must be able to measure your technological advancement(s) against the (global) state of the art or baseline - this is especially hard in the field of AI which moves so fast!

❌ The “software trap.” Software R&D claims have come under intense scrutiny. A common mistake is that many companies assume that developing new features, using machine learning to optimise workflows, or integrating AI-powered decision-making qualifies — but HMRC often sees this as routine adaptation, not ground-breaking development. Demonstrating that a software development project advances technology involving some identifiable appreciable improvement for the entire software industry is tricky.

🚧

The Hidden Risk Most Founders Don’t Know About
Many founders make the mistake of thinking, “If I get the money, I must have done it right.” But that’s not how it works: “Process now, check later” is HMRC’s approach—and when they do check, they’re being ruthless.

So, How Can AI Startups Actually Qualify for R&D Tax Relief?

✅ You must prove you’re advancing AI technology itself—not just leveraging AI tools in an interesting way. Your software development activities need to show an advance in science that involves overcoming one or more technical challenges.
✅ Show technical uncertainty—that means even skilled AI engineers wouldn’t have known how to achieve your results when you started due to the underlying technological uncertainty.
✅ Have in-house expertise—if all your AI development is outsourced, HMRC may argue that the “real” R&D was done elsewhere (see reference to the importance of competent professionals above, especially in the software industry).
✅ Keep detailed records—you need to document why your work was difficult and how you overcame technological uncertainty and/or technological challenges in your attempts to achieve the technological advances.

Thinking About R&D Tax Credits for Your AI Startup? Let’s Chat.

We are tax specialists who help tech founders and software businesses navigate the new R&D tax credit landscape, ensuring they file successful R&D tax credits claims while avoiding costly mistakes. If you’re unsure whether you qualify for R&D tax relief —or want to plan for a future tax relief claim - contact us.

Are you in the software sector? Have you tried to claim R&D tax credits relief for AI software development project work? What was your experience? Let’s discuss in the comments!

Photo by Solen Feyissa / Unsplash