Many founders tell us the same thing: “Our R&D project didn’t work, so does that mean we can’t claim R&D tax relief?”
It’s one of the most common worries we hear from SMEs using Tax Cloud, especially when a prototype crashes, a material doesn’t behave as expected, or a model never reaches the accuracy you hoped for.
The good news is that failed R&D projects can still qualify, and in many cases they’re more clearly eligible because they demonstrate real scientific or technological uncertainty. In this blog, we’ll explain when failed R&D qualifies, what evidence HMRC expects, and how you can claim for your hard work.
Can you claim R&D tax relief if the project failed?
Short answer: yes!
HMRC focuses on the attempt to solve scientific or technological uncertainty, not the outcome. In fact, the R&D tax relief scheme is designed to support innovation that involves risk, iteration and experimentation, including work that doesn’t achieve the intended result.
HMRC is clear about this in their guidance:
“Even if the advance in science or technology sought by a project is not achieved or not fully realised, R&D still takes place.”
To qualify, a failed project still needs to show:
- An attempt to achieve a scientific or technological advance
- Genuine uncertainty that competent professionals couldn’t easily resolve
HMRC gives this example regarding abortive projects:
“Not all projects achieve the advance in science or technology they are seeking. For example, work to insert a particular gene into a gene sequence may simply fail, while an attempt to appreciably increase the life of a battery may only yield a marginal improvement. In both cases, the project seeks to achieve an advance in science or technology and work to resolve the scientific or technological uncertainty would be R&D.”
What does HMRC consider a “failed” R&D project?
In the tax context, a “failed” project simply means the sought-after advance wasn’t achieved. It doesn’t imply the work was low quality or commercially flawed. Failure can actually signal that real scientific or technological uncertainty was present—exactly what HMRC wants to see.
Here are two simple examples:
- Company A (Software): A startup built an AI-driven scheduling tool, but the prototype consistently crashed under real-time load. Despite multiple iterations, the team couldn’t stabilise it.
- Company B (Manufacturing): A small engineering firm tested new composite materials for lightweight components. None met the durability thresholds required, and the project was halted.
In both cases, the project didn’t make it to market, but the R&D still qualifies.
However, a project that fails at market, or stalls due to commercial reasons isn’t evidence of R&D. A company that develops a new line of swimwear that doesn’t take off (and does not improve upon the technology of constructing the garment) will not qualify because the market. Similarly, running out of money or not being able to find the right talent to work on your advance is not inherently evidence of R&D.
Why does HMRC still reward R&D projects that fail?
HMRC continues to pay out the credit because failure is a natural part of innovation. If every experiment worked the first time, there would be no uncertainty and therefore no R&D.
Failed projects often make clearer claims, because they demonstrate:
- Uncertainty wasn’t easy to resolve and even skilled professionals couldn’t solve it quickly.
- The company incurred real costs trying to achieve an advance.
- The work expanded technical knowledge, even if nothing reached the market.
HMRC wants businesses to take risks, experiment, and learn. This positions the UK at the forefront of innovation and supports our economy. The R&D tax relief scheme supports exactly that.
What R&D costs can you claim for a failed project?
You can still claim the same qualifying costs as you would for a successful project, including:
- Staff costs (salaries, employer NIC, pension contributions)
- Subcontractor costs
- Externally Provided Workers (EPWs)
- Consumables used in testing and prototyping
- Software licences and cloud hosting needed for development
This applies across typical SME activities such as:
- Building early-stage software prototypes
- Running mechanical tests or simulations
- Trialling new manufacturing methods
- Experimenting with algorithms that never reached deployment
If the work addressed a genuine uncertainty, the costs likely qualify.
What records should you keep for failed R&D projects?
For SMEs with early-stage R&D, this is often the biggest area of worry. Fortunately, HMRC isn’t expecting perfect documentation, but they do expect evidence that R&D took place.
Useful records include:
- Technical notes or developer logs
- Sprint boards or dev tickets
- Test results, benchmarking outputs, trial data
- Evidence of iterative steps
- Cost breakdowns and time allocations
What examples of failed R&D projects qualify?
Software example: Company A
Company A attempted to design a new AI model for predicting real-time demand. After months of testing, they couldn’t overcome performance bottlenecks, and the system was unstable at scale. They eventually reverted to an industry-standard model, but the attempt to create something more advanced still qualifies as R&D. The project is currently paused but could be taken up again in the future.
Engineering example: Company B
Company B trialled a micro-component manufacturing process using a new alloy combination. Despite three months of controlled experimentation, the materials repeatedly cracked under stress. The project was shelved, but because they were seeking an advance and tackling genuine uncertainty, the work is eligible.
Green tech example: Company C
Company C developed a lightweight battery prototype that overheated during thermal stability tests. After analysing the root cause, they pivoted to a different chemical configuration and began a fresh prototype. This prototype worked but was only marginally better than the industry standard. Both versions still count as R&D because the work sought an advance and involved experimentation.
When wouldn’t a failed project qualify for R&D tax relief?
Not all failures are eligible for R&D tax. A project will not qualify if:
- It didn’t attempt a scientific or technological advance (e.g., redesigning your website layout)
- The uncertainty was already publicly resolved (e.g., using an off-the-shelf algorithm without modification)
- The company changed direction for purely commercial reasons (e.g., the project was stopped because a competitor launched a similar product)
- No systematic research or experimentation took place (e.g., abandoning a feature before any technical investigation)
The project must involve technical challenges, not just commercial or design decisions.
Key Takeaways
- Yes, failed R&D projects often qualify for tax relief.
- HMRC values attempted advances, not just successful outcomes.
- Clear documentation of uncertainties, tests and iterations makes your claim stronger.
If you’d like support preparing your R&D tax relief claim, successful or not, you can get started with Tax Cloud in just a few minutes.
