R&D tax relief is a form of Corporation Tax incentive that can either lower your company’s tax liability or provide a repayable cash credit.
Research and Development (R&D) tax reliefs offer substantial financial incentives for businesses that invest in innovation. By offsetting eligible development costs, these schemes effectively subsidise the creation of new or improved products, processes, and services.
Understanding R&D
To qualify for R&D tax relief, a project must aim to advance science or technology by resolving scientific or technological uncertainties. It must seek a breakthrough that could not easily be achieved by a competent professional in the field.
The project can either work towards,
- Creating new products, processes or services or,
- Changing or modifying an existing product, process or service.
The Department for Science, Innovation and Technology (DSIT) has a guidelines to define these criteria. And HMRC’s Guidelines for Compliance (October 2023) outline the types of evidence required to demonstrate qualifying R&D activity. Maintaining detailed documentation throughout the project lifecycle is essential to support your claim.
1. Does My Project Qualify?
Determining whether a project qualifies for R&D relief requires both technical expertise and a detailed understanding of HMRC’s criteria.
Projects generally qualify when they:
- Aim to achieve a scientific or technological advancement.
- Involve the resolution of genuine technical uncertainties.
- Cannot be easily replicated or deduced by a competent professional.
Our experienced R&D advisors with scientific and technological backgrounds can help you assess eligibility, prepare supporting narratives, and ensure claims are fully compliant with current HMRC requirements.
2. Types of R&D Tax Relief
The level and form of tax relief available depend on the scheme under which your business qualifies and the timing of the expenditure. The Government has restructured R&D schemes in recent years, resulting in the following key changes:
- SME Scheme (up to 1 April 2024) and R&D Intensive Scheme for loss-making small and medium-sized enterprises.
- R&D Expenditure Credit (RDEC) and the Merged Scheme (from 1 April 2024), covering large companies and most claimants thereafter.
Relief may be received as a Corporation Tax reduction or a repayable tax credit, depending on the scheme.
R&D tax credits are determined by the amount you spend on qualifying research and development activities. The rate of relief you can claim depends on the specific incentive you’re applying for, as outlined in the table below.
| SME R&D tax incentive | SME R&D tax incentive | RDEC Scheme | RDEC Scheme | MERGED Scheme | |
|---|---|---|---|---|---|
| Up to 31/03/2023 | From 01/04/2023 | Up to 31/03/2023 | From 01/04/2023 | APs starting after 01/04/2024 | |
| Profitable company | Total benefit =24.7% Uplift on costs = 130% | Total benefit =21.5% Uplift on costs = 86% | Post tax benefit = 10.5% Pre-tax rate = 13% | Post tax benefit = 15% Pre-tax rate = 20% | Post tax benefit = 15% Pre-tax rate = 20% |
| Loss making company | Repayable credit =33% Uplift on costs = 130% | Repayable credit =18.6% Uplift on costs = 86% | Post tax benefit = 10.5% | Post tax benefit = 15% | Post tax benefit = 16.2% |
| Loss making R&D intensive company (ERIS) | Repayable credit =27% Uplift on costs = 86% | Repayable credit =27% Uplift on costs = 86% |
3. Claim Deadlines and Notification
R&D tax credit claims form part of your Corporation Tax return and must be submitted within one year after the end of the accounting period. You then have a further 12 months to amend your return—allowing a total of two years from the period end to file or revise a claim.
Under new rules, companies intending to claim must also complete the R&D claim notification process before submission. Additional considerations apply when R&D activities are contracted out or subcontracted, particularly under the merged scheme rules effective from April 2024.
4. Qualifying R&D Expenditure
Accurately identifying and tracking qualifying costs is crucial. Eligible costs include those directly related to R&D activities and, in some cases, certain indirect costs that contribute to the R&D effort.
To qualify, expenditure must be revenue in nature—deductible for tax purposes—and not capital. Capital costs, such as those for buildings or plant and machinery, should instead be claimed under Research & Development Allowances (RDA), which provide a 100% first-year deduction for eligible capital assets.
5. Common Qualifying Costs
- Staff costs: salaries, employer NIC, and pension contributions.
- Externally provided workers (EPWs) and eligible subcontractor costs.
- Consumables and materials used directly in R&D.
- Software licences, cloud computing, and data costs.
- Utilities directly supporting R&D activities.
From 1 April 2024, under the merged R&D scheme, non-UK costs generally no longer qualify, subject to limited exceptions where overseas work is necessary for regulatory or environmental reasons.
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6. How R&D Relief Is Calculated
For claimants under the merged scheme or RDEC, the relief process follows a seven-step sequence:
- Offset against Corporation Tax – The credit is first used to reduce tax due for the period.
- Determine the net credit – Only the net amount (after Corporation Tax) may be repaid in cash; excess is carried forward.
- Apply the PAYE/NIC cap – Cash repayments are capped at a multiple of the company’s total PAYE and NIC liabilities.
- Offset against other periods – Remaining credits may reduce Corporation Tax due in earlier or later periods.
- Group relief election – Credits can be surrendered to other group companies to offset their tax liabilities.
- Offset against other liabilities – HMRC may apply remaining credits to VAT or PAYE debts.
- Payment of residual credit – Any balance is repaid directly to the company.
Different rules apply for the R&D Intensive Loss-Making Scheme, which offers enhanced support to companies where R&D represents a significant proportion of overall expenditure.
7. Caps for Loss-Making Companies
All UK R&D schemes apply a cap on payable credits for loss-making companies. The merged and R&D intensive schemes use the more generous limits previously available under the SME regime.
The payable R&D credit is capped at £20,000 plus 300% of the company’s total PAYE and NIC liability for the period. However, businesses may be exempt from this restriction if:
- Their employees are involved in creating, managing, or preparing to create intellectual property (IP); and
- No more than 15% of total qualifying R&D expenditure is spent on connected-party subcontractors or externally provided workers from connected parties.
The cap is time-apportioned for accounting periods longer or shorter than 12 months.
8. Evidence and Compliance Requirements
HMRC requires detailed evidence to support R&D claims, including:
- Project descriptions highlighting the scientific or technological challenges addressed.
- Documentation showing how uncertainties were identified and overcome.
- Cost breakdowns and time records linking expenditure to qualifying activity.
Accurate record keeping throughout the project is vital. The Guidelines for Compliance emphasise the need for contemporaneous evidence—particularly where projects involve complex or iterative development. Robust documentation significantly reduces the risk of HMRC enquiry and supports the credibility of your claim.
How Professional Advice Can Help
Preparing an R&D claim can be complex, requiring collaboration between financial, technical, and tax specialists. Professional advisors can assist at every stage, including:
- Assessing whether projects meet HMRC’s definition of qualifying R&D.
- Preparing clear technical narratives and financial summaries.
- Managing compliance with notification and record-keeping rules.
- Supporting clients in the event of HMRC enquiries or disputes.
Working with experienced specialists ensures that claims are both maximised and compliant minimising risk while optimising potential relief.
Maximising the Value of Your R&D Efforts
R&D tax reliefs remain one of the UK Government’s most valuable tools for encouraging innovation. Whether developing new software, advancing manufacturing processes, or improving scientific methods, understanding the relief system can provide significant financial benefits.
By maintaining accurate project records, applying the correct scheme rules, and engaging professional support, businesses can secure the full value of R&D tax incentives. These reliefs not only improve cash flow but also help fund future innovation strengthening long-term competitiveness in a rapidly evolving market.
Need assistance with your R&D claim?
Our experienced R&D specialists can guide you through every step from project design to claim preparation and HMRC engagement.
Get in touch to discuss how we can help your business make a successful R&D claim.
FAQs
Can my business claim R&D tax relief?
R&D tax credits are UK government incentives that reward companies developing new or improved products, processes, or software. Any company not just science or tech firms can claim R&D tax credits if its work involves overcoming technical challenges.
To qualify for R&D, your business project must try to solve or improve a real technical uncertainty (something experts can’t easily answer) and document your process.
How can I distinguish between non eligible and qualifying R&D projects?
It’s crucial that potential research and development (R&D) projects are accurately assessed to ensure all claims submitted to HMRC are correct. A common misconception is that any project involving the creation of a bespoke process, material, device, product, or service automatically qualifies for R&D relief. In reality, this is not always the case.
For a bespoke process, material, device, product, or service to qualify, it must contribute to an advancement in overall knowledge or capability within a field of science or technology and achieving that advancement must involve overcoming scientific or technological uncertainty.
In other words, while a project may be innovative, that alone does not guarantee eligibility for relief. Each project must be carefully evaluated on its own merits a process that our experts are fully equipped to manage.
How long does it take for a claim to be paid out?
The time it takes for HMRC to process and pay a research and development (R&D) tax credit or refund can vary based on several factors. Many of these factors are outside the claimant’s control for example, periods when a high volume of claims are submitted, operational delays at HMRC, or significant changes to tax legislation.
In some cases, HMRC may request additional evidence to support a claim. If an aspect enquiry is opened, payment will be delayed until HMRC is satisfied that the claim is valid and accurate.
Under normal circumstances, however, a well-prepared claim is typically paid within 4 to 10 weeks of submission.
Can i make a R&D claim despite receiving grant income?
Many companies mistakenly believe they cannot receive both grant income and R&D tax credits for the same accounting period, a misconception we frequently encounter when supporting our clients.
In reality, it is possible for businesses to claim both, provided the relevant regulations are carefully followed. The eligibility of an R&D tax relief claim will depend on the nature of the grant received and the specific terms outlined in the grant agreement.
Certain grants such as Innovate UK Smart Grants and those covered under the UK’s Small and Medium Enterprises (SME) R&D tax relief scheme are classified as notified State Aid under EU rules. These regulations were designed to prevent unfair competitive advantages that could arise from government funding.
In contrast, the Research and Development Expenditure Credit (RDEC) scheme is not considered notified State Aid. This distinction allows notified State Aid grants and RDEC claims to coexist within the same accounting period.
Research and Development Expenditure Credit (RDEC) Explained