Are English crypto founders unsure whether development of smart contracts, onâchain protocols or tokenâhandling systems qualifies for R&D tax credits? This guide explains, in plain terms, how to identify qualifying activity, prepare an SME R&D claim for blockchain projects and avoid HMRC enquiries.
Key takeaways: what to know in 60 seconds
- Eligibility hinges on technical uncertainty: if the project attempts to resolve a technological uncertainty through systematic work, it may qualify. Tokenomics design alone rarely qualifies unless it involves novel technical solutions.
- Claim SME R&D relief when meeting size and risk tests: small companies (fewer than 500 staff and <âŹ100m turnover or âŹ86m balance sheet) can claim the more generous SME scheme provided subcontracting and grant rules are observed. For many crypto startups, SME relief gives the highest cash value.
- Qualifying costs include staff, software and subcontracted development where they directly relate to R&D mining hardware costs are generally revenue rather than qualifying capital expenditure.
- HMRC scrutiny focuses on evidence and technical narrative: maintain code commits, test logs, architectural decisions and time records; use reproducible examples and a clear technical narrative.
- Combine reliefs carefully with crypto tax rules: reimbursements, token issuance and VAT interactions can alter the tax position; professional advice should be obtained before filing large or complex claims.
How English crypto startups qualify for R&D tax credits
Eligibility for R&D & tax reliefs for crypto startups depends on the statutory test in the UK: the project must seek an advance in overall knowledge or capability in a field of science or technology, and must involve resolving technological uncertainty. For crypto projects this typically maps to:
- developing novel consensus mechanisms or scaling solutions where existing methods cannot be adapted;
- creating provably secure onâchain protocols or cryptographic integrations not available off the shelf;
- engineering crossâchain bridges that avoid known failure modes and require novel engineering.
HMRC accepts software R&D where a technical advance is sought. Purely business model innovation or legal/regulatory design does not meet the R&D definition. For example, a new token economic design that uses standard smart contract primitives will likely fail the test; the same token scheme implemented to meet a novel cryptographic requirement or stateâchannel optimisation might pass.
Tests and size rules that matter
- The SME R&D relief requires the company to be small: under 500 employees and under âŹ100m turnover or âŹ86m balance sheet total. If a crypto startup has received large grants or has significant connected parties, the SME test can fail and the RDEC (large company) regime applies, which is less generous.
- Grant funding or contracting to deliver R&D for a client can prevent SME claims. If research was subsidised by a grant, check the grant terms carefully and consider RDEC or restricted SME claims.
Documentation HMRC expects
A successful technical narrative must show: problem statement, uncertainties, hypotheses, experiments, outcomes and why the solution is not readily deducible by a competent developer. Evidence should include:
- commit history with timestamps and branch notes;
- issue tracker entries (e.g. GitHub/GitLab) linking to technical experiments;
- test and benchmarking outputs showing comparative results;
- time allocation sheets showing who spent how much time on R&D tasks.
Refer to official HMRC guidance via HMRC SME R&D guidance for structure and examples.
Practical steps to claim SME R&D relief for blockchain
A pragmatic stepâbyâstep approach reduces risk of enquiry and increases likelihood of a fast, successful claim.
Step 1: map technical activities to R&D definitions
- List development activities month by month.
- For each activity, state the scientific or technological uncertainty and the approach taken to resolve it.
- Separate routine engineering work (maintenance, nonâexperimental porting) from experimental development.
Step 2: collate qualifying costs and evidence
- Identify staff costs, direct software licences, cloud compute used for experiments, and subcontracted R&D costs.
- Ensure timesheets or project management logs allocate time to R&D tasks.
Step 3: calculate the claim
- For SMEs, qualifying expenditure attracts a 130% uplift (as of current SME rules) resulting in an enhanced deduction of 230% of qualifying costs for relief purposes; the payable credit rate for surrender is set by current HMRC rules â check rates for 2026.
- Example calculation (simplified): if qualifying staff costs = ÂŁ200,000, enhanced deduction = ÂŁ460,000 (230% of ÂŁ200,000). The corporation tax saving or payable credit depends on the companyâs taxable position.
Step 4: draft the technical narrative and the CT600 entries
- Prepare a short technical report (1â3 pages) summarising the project and the uncertainties.
- Complete the CT600 and include the R&D claims in the relevant supplementary pages (R&D tax claim boxes). For guidance on CT600 completion see CT600 guidance.
Step 5: submit and maintain records for 6 years
- File the return with the claim. Retain all evidence for HMRC enquiries: code snapshots, build logs, and test benches.
Qualifying expenditure: software, mining costs and development
Understanding which costs are eligible is critical for crypto startups where mixed activities are common.
| Cost type |
Treatment for SME R&D |
Typical crypto examples |
| Staff salaries (directly involved) |
Qualifying |
Protocol engineers, research engineers working on experimental features |
| Contractor/subcontractor payments |
Qualifying in many cases (subject to rules and connected party tests) |
Outsourced research to specialised cryptography firm (check contracts) |
| Cloud compute and testnet costs |
Qualifying when used for experimentation |
Private testnets, benchmarking, fuzzing infrastructure |
| Software licences |
Qualifying if used directly in R&D |
Specialised cryptography libraries with dev licences |
| Hardware mining rigs or ASIC purchases |
Generally not qualifying (capital expenditure) |
Purchase of mining hardware is capital in nature; running costs may be revenue but excluded from R&D unless used directly as an experimental platform to resolve a technical uncertainty |
| Token issuance costs |
Usually nonâqualifying |
Token listing/marketing costs are nonâR&D engineering work in writing novel smart contract mechanisms may qualify |
Note: cloud and testnet costs must be clearly attributable to experimental activity; routine usage or production infrastructure is unlikely to qualify.
Software development nuances for onâchain vs offâchain work
- Onâchain (smart contracts, validators): qualifies when implementing novel consensus logic, novel contract upgrade mechanisms or secure multiâparty computations that require research work.
- Offâchain (indexers, orchestration, relayers): may qualify if the work involves creating new software patterns or solving performance/security uncertainties not solvable by standard libraries.
HMRC guidance and recent updates affecting crypto claims
HMRC has updated guidance periodically to reflect software development realities. Key points for 2026:
- HMRC emphasises technical narrative quality and evidence linking costs to R&D activity.
- Greater focus on openâsource contributions: if public contributions are made, maintain contributor agreements and time tracking for commercial R&D expenditures.
- HMRC has published case studies on complex software â these are useful comparators but rarely map perfectly to crypto stacks.
Relevant HMRC resources:
These pages are essential when preparing a claim and when assessing whether grant receipt or connected party arrangements alter eligibility.
Avoiding common pitfalls and HMRC enquiries for startups
HMRC enquiries commonly arise from poor documentation, vague technical descriptions and misâallocated costs.
Typical triggers for an enquiry
- Claims that lack a clear statement of technological uncertainty.
- Large claims submitted in the first years of trading without corroborating project logs.
- Ambiguous allocation of cloud costs and subcontractor fees.
How to respond and reduce risk
- Produce a concise technical appendix that maps activities to code commits and test results.
- Keep records of decision points (design reviews, architecture change logs) and link them to time records.
- If subcontractors are used, retain statements of work specifying R&D deliverables and ownership of intellectual property.
Example wording for a technical narrative (short template)
- Problem: describe the technical problem in one sentence.
- Uncertainty: explain why existing approaches could not be adapted.
- Approach: summarise experimental approaches and alternative architectures tested.
- Outcome: state whether the uncertainty was resolved and what technical advance was achieved.
Tax planning: combining R&D relief with crypto tax rules
R&D relief interacts with other tax treatments relevant to crypto startups:
- Token issuance and employee incentives: when tokens are issued as remuneration, National Insurance and income tax issues arise; R&D relief does not alter payroll taxes. Ensure tokenâbased compensation expense is correctly categorised for R&D claims.
- Grants and investor funding: grant funding may restrict SME claims. Equity financing generally does not impede R&D relief but check connected enterprise status.
- VAT: most software development is standardârated; reclaiming VAT is separate from R&D relief and must be handled in VAT returns.
A checklist for planning:
- Confirm SME status before calculating the claim.
- Identify any grants/subsidies and adjust the claim method accordingly.
- Ensure payroll and token rewards are recorded and treated separately for R&D calculations.
R&D claim process at a glance
đStep 1 â Identify experimental activities and uncertainties
đ§ŸStep 2 â Collate evidence: commits, logs, tests
đ·Step 3 â Calculate qualifying costs and prepare CT600 entries
đ€Step 4 â File claim, retain records for 6 years
đStep 5 â Prepare for potential HMRC enquiry with a technical pack
Advantages, risks and common mistakes
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Benefits and when to apply
- Immediate cash flow benefit where the company is lossâmaking (surrender for payable credit) or reduced corporation tax when profitable.
- Supports continued R&D investment, especially for teams experimenting with consensus, cryptography and novel state management.
- Useful for early stage projects where activity is experimental rather than productised.
â ïž Errors to avoid and risks
- Claiming routine maintenance or business model design as R&D.
- Poor allocation of cloud or node infrastructure costs between experimental and production use.
- Failing to adjust claims if grant funding or subcontracting rules apply.
Practical example: simplified numerical worked example
A small crypto startup spends the following on qualifying development in a year: staff costs ÂŁ150,000; cloud testnet costs ÂŁ12,000; subcontractor R&D ÂŁ38,000. Total qualifying costs = ÂŁ200,000.
Under the SME scheme (enhancement 130%), the taxable deduction = ÂŁ200,000 Ă 230% = ÂŁ460,000. If the company is lossâmaking it may surrender the loss for a payable tax credit; the payable rate varies with current HMRC policy (check 2026 rates).
This simplified worked example demonstrates how a relatively modest spend on experimental development can generate meaningful tax savings or refunds.
Frequently asked questions
What counts as a technological uncertainty for blockchain R&D?
Technological uncertainty exists where a competent developer cannot readily deduce a solution using existing knowledgeâe.g. inventing a new L2 optimisation or a secure crossâchain relay.
Can openâsource contributions be included in a claim?
Yes, but companies must show they incurred costs and retain evidence of time spent; open distribution does not prevent claims but companies must justify commercial R&D expenditure.
Are mining costs eligible for R&D relief?
Generally no: purchases of mining hardware are capital expenditure. Running costs are typically revenue but seldom qualify unless used directly in a documented experimental project.
How long should supporting records be kept?
Records should be kept for at least six years from the end of the accounting period to which the claim relates.
Does issuing tokens affect eligibility for R&D relief?
Token issuance itself is not R&D. Engineering work for novel token mechanics may qualify if it resolves technical uncertainty.
What happens if HMRC opens an enquiry into an R&D claim?
Provide the requested technical pack, evidence and correspondence. Early, transparent engagement and organised documents usually shorten the enquiry process.
When should an RDEC claim be used instead of SME relief?
If the company does not meet SME size rules, has received grant funding that restricts SME claims, or has connected large undertakings, RDEC may be appropriate despite lower generosity.
Can early stage startups claim cash refunds?
Lossâmaking SMEs can surrender qualifying losses for a payable tax credit subject to current rates and rules; check the latest HMRC guidance or seek tax advice.
How should subcontractor costs be presented?
Show contracts detailing deliverables, invoices, and evidence tying subcontractor work to experimental activities. For connected party subcontractors additional rules apply.
Your next step:
- Prepare a oneâpage technical summary for current projects that states the uncertainty and experimental approach.
- Compile time records and link them to commits and test evidence for the last 12 months.
- Contact a specialist tax adviser to validate SME status and the preferred claim route before filing the CT600.