A guide to the Patent Box and how to qualify
Learn if your business qualifies for Patent Box relief and how you can claim it.
Accountants and advisers for AI and software development companies
Specialist accounting, R&D tax relief, and corporate finance support for AI, machine learning, and software development companies, from seed funding to exit.
Price Bailey provides accounting, tax, audit and corporate finance advice to AI, machine learning, and software development companies across the UK, from early-stage, venture-backed businesses through to scale-up and exit. We advise on R&D tax relief under the merged scheme and Enhanced R&D Intensive Support, SEIS and EIS funding, development cost capitalisation, intellectual property structuring, and the funding, growth, and exit decisions that follow.
Our technology team works with founders and finance teams building AI, machine learning and software products, all of which are venture-backed businesses aiming to scale. We support these businesses from their very first funding round through to an eventual sale, all while providing the accounting, R&D, tax, audit and corporate finance expertise that this kind of business actually needs.
The separate decisions that shape an AI or software company, such as R&D claims, how development spend is treated in accounts, equity structuring and selling intellectual property, all need to work together, rather than dealt with as separate components by different professionals. Our team can provide this holistic approach.
Supporting AI and software businesses at every stage
R&D tax relief for AI and software development
Is your AI or software work advancing the field, or just using it?
Just because a business is building something with AI, it doesn’t automatically pass HMRC’s test. They must prove that they are advancing AI or the software technology itself, not simply applying existing tools and techniques to a business problem. This distinction is the most important test for an R&D claim, and also the most commonly misjudged. Most AI businesses sit somewhere between the two sides, i.e. using established tools for most of the product, while genuinely advancing the field in specific, identifiable areas. Isolating these areas accurately supports a defensible claim, and can save an HMRC enquiry.
The merged scheme and Enhanced R&D Intensive Support
Most companies now claim under the merged R&D expenditure credit scheme. However, loss-making companies that spend a high proportion of their total expenditure on qualifying R&D, above a 30% intensity threshold, may instead qualify for Enhanced R&D Intensive Support (ERIS), which offers a more generous cash credit than the merged scheme.
| Merged scheme | ERIS | |
| Rate | 20% taxable credit | 186% total deduction, plus up to 14.5% payable credit on the loss, tax-free |
| Intensity threshold | None | At least 30% of total expenditure on qualifying R&D |
| Who qualifies | Any trading company chargeable to Corporation Tax | Loss-making SMEs only meeting the intensity test |
| How relief is delivered | Taxable expenditure credit (reduces tax, adds to income) | Non-taxable cash credit,paid against the loss |
Source: GOV.UK, “Research and Development (R&D) tax relief: the merged R&D expenditure credit scheme and enhanced R&D intensive support.”
Every claim now requires an Additional Information Form submitted alongside it, and advance assurance is available for some early-stage companies making a first claim, giving pre-approval before the return is filed.
Why claims are under more scrutiny than ever
HMRC’s approach to R&D claims has tightened considerably, and claim volumes across the market have fallen as a result. Weak or overstated claims now attract enquiry rather than payment. This matters particularly for development agencies and contract software businesses, where the subcontracting and subsidised expenditure rules determine whether the company doing the work, or the client paying for it, is entitled to claim, and getting this the wrong way round is one of the most common reasons a claim fails.
We prepare claims with a dedicated R&D team, building the technical narrative and the numbers together so a claim holds up under scrutiny rather than triggering it.
Funding your business: SEIS, EIS, and grants
Early-stage AI and software companies typically fund through a combination of Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) relief, venture capital, and increasingly, grant funding for innovative technical work.
Structuring for SEIS and EIS eligibility needs to happen before a business takes investment, not after, since certain share classes and structures can put relief out of reach without anyone realising until an investor asks.
Grant funding interacts directly with R&D tax position. Grants can affect whether expenditure is treated as subsidised for R&D purposes, which changes what you can claim and under which scheme. Getting the sequencing and structuring of grant funding and R&D claims wrong is a common and expensive mistake.
As you move through venture capital rounds, we support financial modelling and investor reporting built for how AI and software investors actually evaluate a business, not a generic template.
IP, development costs, and revenue treatment
How you treat development spend in your accounts is a judgement call with real consequences, and it is where an AI or software business most needs specialist advice rather than a generalist accountant’s default position.
Under FRS 102 and IAS 38, research costs are written off as incurred, while development costs may be capitalised once specific recognition criteria are met, broadly, once technical feasibility and an intention to complete and use or sell the asset can be demonstrated. Where a business sits on that line changes what your balance sheet and profit and loss look like in a given year, and inconsistent treatment is exactly the kind of thing an investor or buyer notices during due diligence.
Where your business has genuinely patentable innovation, Patent Box can reduce the tax paid on profits from that intellectual property, and how you structure IP ownership affects both your R&D position and what a future funder or buyer is actually acquiring.
Where this page ends and our SaaS page begins: if your business runs on subscription revenue with an established customer base, our SaaS page covers ARR, MRR, revenue recognition, and subscription accounting in depth. This page focuses on R&D intensity, IP creation, and the funding of genuinely novel technical development, which is usually the more pressing issue earlier in an AI or deep-tech company’s life.
Read more on intellectual property and development cost treatment.
Scaling and international expansion
As an AI or software business scales, two pressures tend to arrive together: the need to attract and retain scarce technical talent, and the need to expand beyond the UK.
Enterprise Management Incentive (EMI) schemes and growth shares are the most common way to give a technical team meaningful equity without an unmanageable tax cost, and getting the scheme design right early avoids expensive problems at the next funding round.
International expansion brings transfer pricing and group structuring into play, particularly where development work, intellectual property, and revenue start to sit in different countries. We help structure that from the outset where possible, and help businesses that have already expanded without the right structure unpick it before it becomes a problem at funding or exit.
Acquisitions and exit
Whether you are acquiring another business, being acquired, or planning a longer-term exit, the same principle applies: the R&D claims, IP ownership, and development cost treatment you have built up over years all surface in due diligence, and inconsistency between them is exactly what erodes a buyer’s confidence in your price.
We support mergers and acquisitions advisory, due diligence on both sides of a deal, valuations built for how AI and software businesses are actually priced, and exit routes including Employee Ownership Trusts.
Why AI and software businesses choose Price Bailey
We provide:
- R&D and tax specialists, who prepare claims built to withstand HMRC’s current level of scrutiny, not just to be submitted.
- Corporate finance and funding expertise, led by Chand Chudasama, covering SEIS, EIS, venture capital, and the funding decisions that shape your valuation.
- Technical depth in IP and development accounting, understanding capitalisation, Patent Box, and how your accounts need to evolve as your business model does.
- Partner-led advice, throughout, from build to exit.
FAQs
Does developing an AI product qualify for R&D tax relief?
It depends on whether the work advances AI or software technology itself, resolving genuine technological uncertainty, rather than applying existing tools and models to a business problem. Using a third-party AI model to build a product is not, on its own, R&D. Developing novel model architecture or solving an unresolved technical problem generally is.
Should software development costs be capitalised or written off as incurred?
Under FRS 102 and IAS 38, research costs are written off as incurred, while development costs can be capitalised once specific recognition criteria are met, broadly, once technical feasibility and an intention to complete and use or sell the asset can be demonstrated. Getting this treatment consistent matters for investor and buyer due diligence.
Can a company still claim R&D tax relief after receiving grant funding?
Often, yes, but grant funding can affect whether expenditure is treated as subsidised for R&D purposes, which changes what can be claimed and under which scheme. The interaction needs planning before funding is accepted, not worked out afterwards.
How does R&D tax relief work for a loss-making, pre-revenue company?
Loss-making companies with a high proportion of R&D spend relative to total expenditure, above a 30% intensity threshold, may qualify for Enhanced R&D Intensive Support, which offers a more generous cash credit than the standard merged scheme.
What is the most tax-efficient way to give equity to a technical team?
Enterprise Management Incentive (EMI) schemes and growth shares are typically the most tax-efficient routes for giving a small technical team meaningful equity, though the right structure depends on your company’s size, stage, and funding plans.
Speak to our technology specialists
R&D relief, funding, and IP decisions made early in an AI or software business shape what it is worth later. Get them right from the start, with advisers who understand where advancing the field ends and using someone else’s tools begins.
Use the button below to get in touch, and we will arrange a conversation with the right specialist for your business.
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