Tax

What is R&D Tax Credits?

R&D tax credits are a UK tax relief for companies that spend money on research and development to advance science or technology.

Current Rate (2025/26)

SME: up to 186% deduction or 27% credit. Large: 13% expenditure credit

Example

Spend £100k on qualifying R&D. Could claim ~£27k cash back if loss-making, or reduce CT bill significantly.

Key Dates

Claim within 2 years of accounting period end

How R&D Tax Credits Works in Practice

R&D tax credits are one of the most valuable reliefs available to UK limited companies. They reward companies that invest in innovation by reducing their Corporation Tax bill or providing a cash credit. The relief is available to any UK company that carries out qualifying research and development, regardless of industry or company size.

From April 2024, the UK moved to a merged R&D scheme called the RDEC (Research and Development Expenditure Credit) for most companies. The merged scheme provides an above-the-line expenditure credit of 20% of qualifying R&D expenditure. For loss-making R&D-intensive SMEs (where qualifying R&D spend is 30% or more of total expenditure), a more generous Enhanced R&D Intensive Support (ERIS) scheme applies, offering a 27% payable credit.

Qualifying R&D must seek to achieve an advance in overall knowledge or capability in a field of science or technology. The work must relate to overcoming scientific or technological uncertainty - something that a competent professional in the field could not readily deduce. Routine development, aesthetic design changes, and work in the social sciences or humanities do not qualify.

Common qualifying activities in the tech sector include developing new software algorithms, building novel data processing methods, creating new manufacturing processes, engineering solutions to technical challenges, and developing new materials or formulations. The key test is always whether the project involved genuine uncertainty that required experimentation or analysis to resolve.

Step by Step

To claim R&D tax credits, you identify qualifying expenditure within your accounting period. This typically includes staff costs (salaries, NI, pension contributions of employees directly engaged in R&D), subcontractor costs (at a restricted rate), consumable materials used in R&D, and software licences used directly in R&D work.

You prepare a claim as part of your Corporation Tax return (CT600), including a detailed technical narrative explaining what R&D projects you undertook, what scientific or technological uncertainties you were trying to resolve, and how the work sought to achieve an advance. You must also prepare a cost breakdown showing how much was spent on each qualifying category.

Under the merged RDEC scheme, the 20% credit is taxable but reduces your Corporation Tax liability. If you are loss-making, you can surrender the credit for a cash payment from HMRC (net of tax, this works out at approximately 15% of qualifying expenditure as cash). For R&D-intensive loss-making SMEs under the ERIS scheme, the payable credit rate of 27% is more generous.

Practical Tips

  • Track R&D time as you go rather than trying to reconstruct it at year end - keep timesheets or project logs showing who worked on which projects and for how many hours
  • Write a brief technical summary for each R&D project explaining the uncertainty you faced and how you tried to resolve it - this forms the basis of your claim narrative
  • Do not wait until the two-year deadline to claim - submit your R&D claim with your CT600 to get the benefit sooner and avoid missing the window
  • Review your subcontractor agreements to ensure you understand the cost restrictions - under the merged scheme, subcontractor costs are typically restricted to 65% of the payment

Common Mistakes to Avoid

  • Not claiming at all because you assume R&D tax credits are only for lab-based research or pharma companies - software development, engineering, and manufacturing can all qualify
  • Including costs that do not qualify, such as marketing, sales, quality control, or routine maintenance and support, which can trigger an HMRC enquiry
  • Missing the two-year deadline for claims - you can only claim R&D relief for an accounting period up to two years after that period ends
  • Failing to prepare adequate technical documentation to support the claim, which is the most common reason HMRC rejects or reduces claims

Frequently Asked Questions

Does software development qualify for R&D tax credits?

Yes, if the software development involves resolving genuine scientific or technological uncertainty. Building a standard website or app using known techniques does not qualify, but developing novel algorithms, working with new technologies, or solving problems where the solution was not readily deducible can qualify.

How much can I claim?

Under the merged RDEC scheme, you receive a 20% credit on qualifying expenditure. For a profitable company paying 25% Corporation Tax, this effectively reduces your net cost of R&D. Loss-making R&D-intensive SMEs can claim a 27% payable credit under the ERIS scheme.

Can I claim R&D tax credits if my company is loss-making?

Yes. Loss-making companies can surrender the R&D credit for a cash payment from HMRC. This is particularly valuable for startups and early-stage companies that are investing heavily in development before generating revenue.

Do I need a specialist to prepare my R&D claim?

It is not mandatory, but highly recommended. R&D claims require a detailed technical narrative and cost analysis. Specialist R&D advisors typically charge a success-based fee of 15-25% of the benefit. Given the complexity of the rules and HMRC's increasing scrutiny, professional advice usually pays for itself.

What records do I need to support an R&D claim?

You should keep project plans, technical reports, emails discussing technical challenges, timesheets showing who worked on R&D projects and for how long, and cost records for materials and subcontractors. The more contemporaneous documentation you have, the stronger your claim.

Source: HMRC Corporate Intangibles Research & Development Manual CIRD80100 - R&D tax relief: overview; HMRC guidelines for compliance GfC1

Related Terms

Corporation Tax

Corporation Tax is the tax UK limited companies pay on their profits. It's like income tax, but for businesses instead of people.

Patent Box

Patent Box is a tax relief that allows companies to apply a lower 10% Corporation Tax rate to profits from patented inventions.

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