CIRD81920 – Guidance on R&D Tax Relief for Pharmaceuticals

HMRC has published an updated version of its guidance, CIRD81920, concerning the application of Research and Development (R&D) tax relief within the pharmaceutical industry. While the fundamental framework describing the stages of drug development remains consistent, the revised guidance reflects small changes in departmental terminology and removes certain explanatory content that previously helped clarify eligibility for relief.

Key terminology updates

The updated guidance replaces references to the now-defunct Department for Business Innovation and Skills (BIS/DTI) with the Department for Science, Innovation and Technology (DSIT), reflecting government restructuring. This change aligns with broader departmental updates but does not affect the technical descriptions of pharmaceutical R&D activities.

Summary of the pharmaceutical R&D stages

The document continues to outline the four main stages of pharmaceutical R&D:

Drug Discovery:
The drug discovery stage is the first step in pharmaceutical research, where new chemical entities (NCEs) are identified. It involves drug synthesis, biological testing, and toxicology studies.

Preclinical Development:
This stage focuses on the early development of selected NCEs, which undergo additional laboratory testing both in vitro and in live animal models to better understand their properties and effects.

Clinical Development (Phases I to III):
Clinical trials begin when a laboratory-identified NCE demonstrates potential as a therapeutic treatment. These candidate drugs are then tested on human participants.

Post Launch (Phase IV):
Phase IV trials take place after a product has received its license. At this stage, previously undetected side effects may emerge, including those resulting from interactions with other medications.

Descriptions of activities at each stage, including laboratory research, animal and human clinical trials, regulatory submissions, and post-marketing studies, remain largely unchanged.

Removal of eligibility clarifications

Significantly, the updated guidance omits previous commentary that helped distinguish which stages typically qualify for R&D tax relief. The former guidance explicitly stated that Phases I to III generally involve resolving scientific uncertainty and therefore often qualify, while Phase IV post-launch studies and commercial activities like brand development often do not.

This removal may introduce uncertainty for claimants who must now rely more heavily on the DSIT definition of qualifying R&D and carefully assess which activities meet the criteria for tax relief.

Implications for pharmaceutical companies

Pharmaceutical companies making R&D claims should take note of the following:

• The burden remains on claimants to demonstrate that expenditures relate to work involving scientific or technological uncertainty.
• Brand development, marketing, and pricing activities remain outside the scope of qualifying R&D and should be excluded from claims.
• Post-launch Phase IV trials are generally not eligible for relief unless exceptional circumstances justify inclusion.
• Detailed documentation evidencing how claimed activities meet the R&D definition is essential, particularly given the loss of explicit guidance.

Recommendations

Businesses in the pharmaceutical sector are advised to:

• Review their R&D claims in light of the updated guidance, focusing on the substance of activities rather than assumptions based on development phases.
• Exclude commercial and marketing-related costs from claims.
• Maintain comprehensive records to support the scientific and technological uncertainties being addressed.
• Seek professional advice if uncertain about the eligibility of particular activities.

Access to the updated guidance

The full revised guidance is available in the HMRC manual:  CIRD81920 – R&D tax relief: conditions to be satisfied: DSIT Guidelines – application to pharmaceuticals – HMRC internal manual – GOV.UK

For assistance in interpreting the updated guidance or preparing compliant R&D claims, please contact our team. Get in touch