R&D tax credits for space and satellite technology

Space companies are among the most natural R&D claimants there are. Building hardware and software that must survive launch and then work, unattended, in an environment you cannot fully test on Earth is close to a working definition of scientific or technological uncertainty. The claims themselves still need care: agency funding, contracted programmes and long pre-revenue phases all change how a claim should be prepared.

What counts as qualifying R&D in space technology?

Work that seeks an advance in the field through uncertainty a competent professional could not readily resolve. At concept level, that regularly includes:

• Platform and payload engineering where mass, power, thermal and radiation constraints interact, and published solutions do not transfer to your configuration.
• Propulsion development, from chemical and electric thruster work to novel propellant handling.
• Radiation-tolerant electronics and the qualification of commercial components for orbit, which overlaps the device and photonics development we cover separately.
• Ground segment and flight software resolving genuine uncertainty, such as autonomy, constellation management or downlink processing at unusual scale.
• In-orbit demonstration programmes, where iteration evidence is often strong by nature.

Routine integration of proven components, on its own, does not qualify. The boundary is the uncertainty, and how the project is documented decides how defensible the claim is.

Two points help the statutory case and belong in the narrative. Uncertainty exists where knowledge of whether something is feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field (paragraph 13), and the orbital environment routinely defeats ground-based prediction. And an advance is still an advance where somebody has made or attempted it but the details are not readily available, a trade secret being the example given (paragraph 11): flight heritage data is among the most closely held information in the industry. Work that fails qualifies on the same basis.

How do engineering, qualification and flight models fit?

This is where most space claims need a boundary drawn, and the Guidelines give two usable rules. The design, construction and testing of prototypes generally fall within the scope of R&D; once modifications reflecting the test findings have been made and further testing satisfactorily completed, the uncertainty has been resolved and further work is not R&D (paragraph 39). And R&D ends when knowledge is codified in a form usable by a competent professional, or when a prototype with all the functional characteristics of the final product is produced (paragraph 34).

Applied to a model philosophy, that puts breadboards, engineering models and the qualification campaign answering an open technical question inside the boundary, and acceptance testing of recurring flight units outside it. Uncertainty emerging later can start new R&D, which the Guidelines separate from routine fault fixing (paragraph 35). Mission analysis is not lost either: feasibility studies to inform the strategic direction of a specific R&D activity sit on the qualifying indirect activities list at paragraph 31.

Does agency or grant funding affect the claim?

Under the current schemes, no. The old subsidised-expenditure restriction is abolished: grant funding, including UK Space Agency and Innovate UK awards, no longer blocks or reduces relief under the merged scheme or ERIS. Much online guidance still repeats the old rule; our grants page corrects it.

Agency and institutional contracts need one more question asked: the contracted-out R&D rules decide whether the customer or the contractor claims. The customer claims only where it is reasonable to assume, having regard to the terms of the contract and the surrounding circumstances, that it intended or contemplated R&D of that sort at contract; otherwise the contractor claims in its own right. HMRC’s guidance says the test requires a specific appreciation of what R&D will be done rather than awareness that some will happen. The customer’s tax position matters too: where the customer is an irrelievable client, the contractor claims in its own right regardless (CTA 2009 s1053A for the merged scheme, s1042F for ERIS). A customer is an irrelievable client if it is an ineligible company — a charity, an institution of higher education, a scientific research association, a health service body, or any other body the Treasury prescribes by order (s1142) — or if it is not, in relation to the contracting out, acting in the course of a trade, profession or vocation within the charge to tax. That can preserve relief for UK companies delivering into overseas and institutional programmes, though every person contracting the work out has to meet the test: an overseas intermediary beneath a UK customer who can claim does not help. It is a test to run on the contract, not on the customer’s name.

Which scheme fits a space company?

Many space businesses spend years pre-revenue with heavy engineering payrolls, which is the profile ERIS exists for. On £100,000 of qualifying spend:

Payable credits under both schemes are limited by the PAYE cap: £20,000 plus 300% of relevant PAYE and NIC, which a small team directing a large outsourced build can reach. The 30% test measures relevant R&D expenditure against the company’s total relevant expenditure — broadly the trading costs in its accounts for the period, not just the R&D ones. The ERIS intensity calculator reads it, counting connected companies on both sides; which scheme applies works through the decision.

Which costs go into a space claim?

Staff costs apportioned to development time, across systems, mechanical, thermal, avionics and software engineering. Prototype and test hardware consumed in development, including units lost in test campaigns, qualifies as consumable costs where it is not sold on; where a unit is sold in the ordinary course of business, the materials in it fall outside. Power consumed by test facilities counts. Externally provided workers and subcontracted development both enter at 65% where the provider or contractor is unconnected, and for workers only so far as their earnings are within UK PAYE and Class 1 NIC; connected parties are restricted instead to the lower of the payment and the other party’s own relevant expenditure. Software, data licences and cloud computing used in the R&D qualify. Capital expenditure never qualifies for R&D tax relief, though it may attract R&D allowances; rent, rates and patent costs never do either, which matters in a sector that spends heavily on cleanrooms, chambers and rigs.

Does overseas launch or test work qualify?

For accounting periods beginning on or after 1 April 2024, subcontracted R&D qualifies only where the work is undertaken in the UK, and externally provided workers only where their earnings attract UK PAYE and Class 1 NIC. The exception is narrow. It needs conditions necessary for the R&D that are absent in the UK, present where the work is actually done, and wholly unreasonable for the company to replicate here — all three (CTA 2009 s1138A(2)). The legislation gives an open list of what counts, including geographical, environmental or social conditions, and legal or regulatory requirements that prevent the work being done in the UK (s1138A(3)(a)). The exclusions are closed: the cost of the R&D activity, and the availability of workers to carry it out (s1138A(3)(b)).

That distinction decides most space cases. A test facility or launch range that does not exist in the UK, or a regulator requiring the activity in its own territory, is a condition of the work. A cheaper provider, or engineers easier to hire abroad, is a condition of the budget. Build the case before the spend: overseas R&D costs sets out what to record.

What evidence does a space claim need?

The sector’s own discipline supplies it. Requirements and verification matrices, trade studies recording options rejected and why, test plans and anomaly reports, and review milestones from PDR through CDR to flight readiness all describe technical uncertainty being opened and closed. An anomaly report that took three campaigns to close beats any narrative written after year end.

Tie those records to a project boundary with a stated advance and uncertainty, and write the Additional Information Form, mandatory for every claim since 8 August 2023, from them rather than from memory. Our page on what records an R&D claim needs covers the general position, and first-time claimants, and companies that have not claimed in the three years ending with the notification deadline, should watch the claim notification deadline: six months from the period of account’s end. Companies engineering for flight within the atmosphere should see aerospace and defence.

Talk it through with a chartered adviser

LimestoneGrey is a firm of chartered tax advisers and chartered accountants specialising in R&D tax relief, regulated by ICAEW. Every claim is prepared by our specialist team and signed off by a chartered adviser, with enquiry support included as standard and the fee agreed before work starts. HMRC checked around one in six claims in 2023-24, its latest published figure, so a programme’s technical case is better documented while the campaign runs: our guide to HMRC R&D enquiries sets out what a check involves.

If your company is building for orbit, a short scoping call will give you a straight view on eligibility and scheme fit. Call 0330 223 4 223 or send us a message.

Sources

• Guidelines on the meaning of R&D for tax purposes — paragraphs 11, 13, 31, 34, 35 and 39.
• CIRD161000 — the intended-or-contemplated test and irrelievable clients; CIRD163000 for the CTA 2009 s1142 definition.
• CIRD151000 — the CTA 2009 s1138A(3)(a) conditions; CIRD151100 — the s1138A(3)(b) exclusion of cost and worker availability.
• Check what R&D costs you can claim — cost categories, the 65% rule, and the capital, rent and patent exclusions.
• R&D tax relief: the merged scheme and enhanced R&D intensive support — the 20% credit and the ERIS conditions.