When a UK biotech engages a contract research organisation (CRO), the R&D tax relief on that work usually belongs to the sponsor, not the CRO. Under the merged scheme the customer claims where it intended or contemplated the specific R&D when the contract was made, and a sponsor commissioning a defined study almost always did. The CRO claims in its own right only where its customer did not, or where the customer is overseas or otherwise outside UK corporation tax. Getting this wrong means one party claiming relief that belongs to the other.
Why does the sponsor usually own the claim?
Because the sponsor’s paperwork proves intention better than almost any other contracting relationship. A CRO engagement is typically built around a protocol or work order that describes the scientific work in detail: the study design, the endpoints, the methods. The R&D was not merely contemplated when the contract was made; it was specified page by page.
That is precisely what the merged scheme’s test asks. The customer claims contracted-out R&D where it intended or contemplated the specific R&D at the point of contracting, and the full analysis of that test sits in our guide to contracted-out R&D: who claims? For a sponsor and CRO, the usual answer is short: the sponsor claims, and the CRO’s fees enter the sponsor’s claim as subcontracted R&D. The same logic covers CDMOs and other specialist providers wherever the commissioning documents specify the technical work in advance.
When does the CRO claim instead?
Two situations move the claim to the CRO.
The first is an overseas or untaxed customer. A contractor whose customer is outside the charge to UK corporation tax can claim in its own right, and this is the everyday reality for UK CROs serving US and European sponsors. A UK CRO running qualifying R&D for a Boston biotech claims on its own costs for that programme, because the sponsor can claim nothing here.
The second is work the customer never intended or contemplated. This is rarer in sponsor relationships, but CROs also do R&D of their own: developing new assay methods, platforms or analytical techniques beyond any client commission. That internal development is the CRO’s own R&D, claimable in its own right under the normal rules.
How much of a CRO invoice enters the sponsor’s claim?
65%, where the CRO is unconnected to the sponsor. Pay an unconnected CRO £100,000 for qualifying work and £65,000 enters the claim, generating a £13,000 gross credit at the merged scheme’s 20% rate.
Loss-making sponsors whose relevant R&D expenditure is at least 30% of total relevant expenditure may do better under Enhanced R&D Intensive Support (ERIS), which is worth up to 26.97p per £1 of qualifying expenditure. The 65% restriction on unconnected subcontractor payments applies under both current schemes, so the split between CRO fees and in-house costs shapes claim value either way.
One practical point on invoicing: only R&D services qualify. Where a CRO invoice bundles qualifying scientific work with routine services, ask for the split. A single line item forces you to apportion later, on weaker evidence.
What is the relief worth to a loss-making sponsor?
Per £100,000 of qualifying expenditure, the current schemes pay out as follows. Remember that the 65% restriction sits in front of these figures: £100,000 of unconnected CRO invoices contributes £65,000 of qualifying expenditure.
| Position | Credit on £100,000 of qualifying spend | Net benefit |
|---|---|---|
| Merged scheme, profitable at the 25% CT rate | £20,000 gross credit | £15,000 |
| Merged scheme, loss-making | £20,000 gross credit, notional tax deducted at 19% | £16,200 in cash |
| ERIS, loss-making and R&D-intensive | £26,970 payable credit, not taxable | £26,970 in cash |
One cap matters particularly to sponsors who outsource heavily. Payable credits under both schemes are limited to £20,000 plus 300% of the company’s relevant PAYE and NIC, and a sponsor with a small internal team and a large CRO programme has a small payroll. An exemption exists where the company is creating or managing intellectual property and connected-party subcontracting stays low; establish whether you meet it before the claim is built, not when the credit is capped.
What if the CRO does the work overseas?
Then most of it falls out of the sponsor’s claim. For accounting periods beginning on or after 1 April 2024, subcontracted R&D qualifies only where the work is undertaken in the UK. Global CROs deliver through networks of sites, so a single engagement can produce qualifying UK work and non-qualifying overseas work under one contract. Sponsors need the work mapped by location, not by contracting entity.
The exception is qualifying overseas expenditure: where conditions necessary for the R&D, geographical, environmental, social or regulatory, are not present in the UK and cannot reasonably be replicated here. A trial needing a patient population the UK cannot supply, or a regulator requiring in-territory studies, can meet it. Cheaper delivery and staff availability are expressly excluded. The rule and its planning consequences are set out in overseas R&D costs under the merged scheme, and the trials angle in clinical trial costs in R&D claims.
Which contract terms decide the claim?
The ones that evidence intention and location. When we review a sponsor and CRO agreement with the claim in mind, we look for:
- a scope of work that describes the scientific programme, or incorporates the protocol, so the intended R&D is visible on the face of the contract
- an express statement of which party intends to claim R&D tax relief
- delivery locations: which sites, in which countries, will perform which work packages
- invoicing terms that separate qualifying scientific work from routine services
- clarity on any onward subcontracting by the CRO, so you know who is actually doing the work and where
None of this wording overrides the facts, and HMRC can look behind any recital. But a contract that matches the facts closes off most arguments before they start.
A practical checklist for biotech sponsors
Before the claim is prepared, a sponsor should be able to answer yes to each of these:
- We hold the contract, work order and protocol showing the R&D was specified when we signed.
- We have confirmed the CRO is unconnected, so the 65% figure applies.
- We know where the work was physically performed, site by site.
- Any overseas costs in the claim rest on a written qualifying overseas expenditure case, made on conditions the UK cannot supply, not on cost.
- Invoices distinguish qualifying R&D services from everything else.
- Both parties know who is claiming, and nobody is claiming the same work twice.
- If this is our first claim, or our first in three years, HMRC received a claim notification within six months of the end of the period of account.
A file that supports those seven answers will also stand up if HMRC enquires into the claim, which currently happens to roughly one in six.
CRO structures sit inside a wider set of sector questions, from grant funding to long pre-revenue loss phases, covered on our life sciences R&D tax relief page. If your CRO arrangements do not fit neatly into the scenarios above, talk it through with a chartered adviser: we will tell you who owns the claim and what evidence to put in place.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
Sources
- CIRD161000: contracted-out R&D — the intended-or-contemplated test and the treatment of customers outside the charge to UK corporation tax.
- Merged scheme & ERIS guidance — the merged-scheme and ERIS rates and the 65% contractor rule that shape claim value.
- Draft guidance: contracting-out & overseas restrictions — the UK-location and qualifying-overseas-expenditure conditions for contracted work.
This article describes the rules as they stood at the review date above. The rules change: for the current position, start with our guides or talk to us.
