R&D Tax Relief on the Costs of Acquiring Licenses for Third-Party Technology

Can Companies Claim R&D Tax Relief on the Costs of Acquiring Licenses for Third-Party Technology? 

When embarking on ambitious research and development (R&D) initiatives, companies often rely on external technologies to bring their ideas to life. These technologies can include specialist software, proprietary databases, or licensed tools necessary for R&D work. One of the most common questions raised by businesses investing in innovation is: 

Can third-party technology license costs be included in an R&D tax credit claim? 

Understanding how these expenses are treated under the UK R&D Tax Relief Scheme is essential for companies looking to maximise their R&D claim and ensure they remain fully compliant with HMRC guidelines. 

Understanding R&D Tax Relief and Qualifying Expenditure 

The UK R&D tax credit scheme is a government-backed incentive that supports companies investing in innovation. Whether your company is developing new products, processes, services, or improving existing ones, the scheme offers significant tax relief or even cash rebates on certain types of qualifying R&D expenditure. 

Common categories of eligible costs include: 

• Salaries and staff costs directly involved in R&D 

• Subcontractor and externally provided worker (EPW) costs 

• Consumables used up during the R&D process 

• Certain types of software costs used in the R&D activity 

However, not all expenses are automatically eligible. One such grey area is the cost of acquiring licenses for third-party technologies.

The Role of Third-Party Technology in R&D

In today’s digital-first R&D landscape, businesses increasingly rely on third-party tools and platforms to support their innovation projects. This could include: 

• Simulation software for modelling physical prototypes 

• Artificial intelligence or machine learning platforms 

• Data analytics tools and access to specialist datasets 

• CAD or design software tailored for engineering solutions 

• Cloud-based platforms essential to experimental development 

These technologies can be crucial enablers for R&D work, helping teams test ideas more efficiently, reduce development time, and increase the reliability of outputs. But does this mean that the associated software license fees or usage costs qualify for R&D tax relief?

When Do Software Licenses Qualify for R&D Tax Relief? 

According to HMRC’s R&D tax credit guidelines, third-party license costs may qualify for relief if they are directly attributable to eligible R&D activities. 

To determine whether your license costs meet this threshold, you must ask the following questions: 

Is the License Used Directly in R&D? 

The software or technology must be essential to the R&D process. For example, if your R&D project involves creating a new aerodynamic vehicle design, and you use specialist simulation software to model airflow, then the software license is directly supporting the R&D activity. 

Is the License Specific to the R&D Work? 

Licenses must not be used for general business operations. If the software or tool is used company-wide for non-R&D purposes (e.g. project management software, accounting tools), it is unlikely to be eligible in its totality. The license must be ring-fenced to support R&D, or its costs must be apportioned. 

Are the Costs Revenue in Nature? 

To qualify under the R&D tax credit scheme, license fees must be revenue expenditure. This means the costs are consumed in the short term, such as ongoing monthly or annual license fees. If the software is purchased outright and capitalised on the balance sheet, it may not qualify under R&D relief but could instead be eligible for capital allowances.  

Can the Link to the R&D Project Be Evidenced? 

HMRC expects to see a clear audit trail showing how and why the license was used in the R&D process. Proper documentation, technical narratives, and time allocation can help demonstrate this link and reduce the risk of enquiry. 

Examples of Eligible and Ineligible Software License Costs 

To better understand what qualifies and what doesn’t, let’s look at some real-world examples. 

Eligible License Costs: 

• A biotech company that licenses genome sequencing software used exclusively in a new drug development project. Because this tool is central to the R&D process and used exclusively for that purpose, the license fees would likely be considered qualifying expenditure.  

• An automotive firm that uses specialist CAD software to design and test a new lightweight chassis. This would likely be eligible as the software directly supports the experimental design and testing phase of their R&D activity. 

• A fintech startup that licenses a data analytics platform to develop an innovative algorithm for fraud detection. Again, the link between the software and the R&D work is clear and specific. 

Ineligible License Costs: 

• Bookkeeping or accountancy software. These are going to be almost entirely used by the finance team for their work, and, although they could be used for reporting/documenting R&D project costs, this would be nearly insignificant when apportioning the qualifying usage. Furthermore, most of these costs are small anyway, so you must balance the risk of HMRC enquiry with the benefit of a few pounds – most of the time, it’s not worth the risk considering the weak argument and the small amounts. 

• Licenses that are used completely by non-R&D teams, such as sales, marketing, or customer service, are also unlikely to meet HMRC’s eligibility criteria. 

• Additionally, software that is purchased outright and capitalised as a fixed asset on the balance sheet typically falls outside the scope of R&D tax relief, though it may qualify for capital allowances instead. 

How TBAT Innovation Can Help with Your R&D Tax Claim 

At TBAT Innovation, we understand that navigating R&D tax relief can be complex, especially when it comes to areas like third-party license fees. Many companies overlook these costs simply because they’re unsure about their eligibility. That’s where we come in. 

Our experienced team of R&D tax credit consultants works closely with both technical and financial stakeholders in your business. We take the time to review your projects in detail and gain a deep understanding of how third-party technologies are used throughout your R&D process. This approach allows us to identify costs that may qualify, including those that may have been previously missed. 

Beyond identifying eligible expenditure, we ensure that your claim is fully compliant with current HMRC guidelines. We help you gather and present evidence that clearly links each license cost to your R&D activities, which helps reduce the risk of enquiries or disputes. 

If certain license costs fall outside the scope of R&D tax relief, we won’t leave you without options. Our team will advise you on alternative innovation funding routes such as capital allowances, grant funding, or other tax-efficient financial incentives. This ensures you get the most value from your investment in innovation.  

Final Thoughts: Can You Claim R&D Tax Relief on Software Licenses? 

In short, yes. You can claim R&D tax relief on software license costs, but only when those licenses are directly linked to eligible R&D activities and meet HMRC’s criteria. With careful assessment and the right expert guidance, many companies can include these costs as part of a broader R&D tax credit claim. This can significantly increase the value of the relief received. 

If your business is using third-party software or technology to support its innovation efforts, it is definitely worth exploring whether these costs could qualify for relief. 

At TBAT Innovation, we have been supporting UK businesses with R&D tax credit claims for more than 20 years. Our team of specialists has a deep understanding of HMRC’s guidance and has successfully helped clients from a wide range of sectors. These include technology, manufacturing, life sciences, and finance. 

If you would like to find out whether your third-party software licenses could be included in your next R&D tax relief claim, contact us today. We can help you assess eligibility, structure your claim correctly, and maximise the value of the relief your business is entitled to. 

Contact us now to schedule a free consultation and take the next step toward unlocking your R&D tax benefits.