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Tax ReliefUpdated 2026-02-12

What is R&D tax relief?

Quick Answer

R&D tax relief allows companies to claim extra tax deductions or cash credits for qualifying research and development expenditure. SMEs can claim up to 21.5% of qualifying costs as a cash credit.

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Detailed Explanation

Two R&D schemes

1. SME R&D Relief (for companies with <500 employees, <€100m turnover or <€86m assets): - Enhanced deduction of 86% of qualifying costs (from April 2023) - Loss-making companies can claim cash credit of up to 10% of surrenderable loss (18.6% for R&D intensive companies) - Effective benefit: 21.5-27% of qualifying costs

2. RDEC (R&D Expenditure Credit) (for large companies and some subsidised R&D): - Tax credit of 20% of qualifying costs (from April 2023) - Taxable, so net benefit around 15% - Can be claimed even if loss-making

Qualifying expenditure

- Staff costs directly involved in R&D - Consumable materials - Software for R&D - Subcontracted R&D work (limited) - Utilities for R&D activities

What counts as R&D? - Seeking advance in science or technology - Resolving scientific or technological uncertainty - Not routine or obvious to a competent professional

Common qualifying activities

- Developing new software products - Creating new manufacturing processes - Improving existing products technically - Experimenting with new materials

Claims must be made within 2 years of the accounting period end.

Source: HMRC R&D Tax Relief Guidance

Real-World Examples

Software Company Developing AI

A software company with 20 employees and a turnover of £1 million is developing a new AI-powered tool for data analysis. Their R&D expenditure on staff, materials, and software subscriptions related to this project totals £50,000. They could potentially receive a cash credit of £10,750 (21.5% of £50,000) from HMRC.

Manufacturing Firm Improving Processes

A manufacturing company with 400 employees and a turnover of £50 million invests in a new robotic system to improve the efficiency of its production line. The project involves significant R&D to integrate the system and optimize its performance. Their qualifying R&D expenditure is £200,000. They would likely claim under RDEC and could receive a tax credit of £40,000 (20% of £200,000).

Consulting Firm Developing a New Methodology

A small consulting company develops a novel methodology for improving team performance. The costs involve their employees' salaries when researching and piloting this methodology. If they spend £30,000 in qualifying costs, they could receive a cash credit of £6,450 (21.5% of £30,000).

Common Mistakes to Avoid

  • Failing to accurately track and document R&D expenditure, which is crucial for supporting a claim.
  • Including activities that are not considered R&D, such as routine maintenance or market research, in the claim.
  • Claiming the SME rate when the company exceeds the SME thresholds, leading to incorrect calculations and potential penalties.
  • Not considering subcontracted R&D costs carefully, especially which scheme can be used to claim them.

How does R&D tax relief interact with other government grants?

If you've received grant funding for your R&D project, this can affect which R&D scheme you are eligible to claim under. Generally, if a project has received state aid, you can only claim under the RDEC scheme for the expenditure related to that project.

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

Yes, loss-making companies can surrender their losses to HMRC in exchange for a cash credit. For SMEs, this credit is up to 10% of the surrenderable loss (18.6% for R&D intensive companies) and subject to PAYE and NIC caps.

What records do I need to keep to support my R&D tax relief claim?

You need to keep detailed records of all qualifying expenditure, including invoices, timesheets, and project documentation. This includes project plans, technical reports, and any correspondence related to the R&D activities. Keep them for at least six years.

What is the PAYE/NIC cap on R&D cash credits?

The amount of cash credit that an SME can claim is capped at £20,000 plus 300% of the company's total PAYE and NIC liability for the period. This prevents abuse, ensuring that R&D claims reflect genuine business activity in the UK.

Practical Tips

  • Maintain a separate cost code for all R&D-related expenses to simplify tracking and reporting.
  • Engage a specialist R&D tax relief advisor to help you navigate the complexities of the legislation and maximise your claim.
  • Document the 'advance in science or technology' element of your project clearly. Explain what uncertainties you addressed and how you overcame them.
  • Conduct a thorough review of your projects at the end of each accounting period to identify all qualifying R&D activities.

Related Questions

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The Annual Investment Allowance (AIA) lets businesses claim 100% tax relief on qualifying capital expenditure up to £1 million per year. It covers plant and machinery purchases.

How does pension tax relief work for company directors?

Company pension contributions get full Corporation Tax relief with no personal tax. Personal contributions get relief at your marginal rate. Annual allowance is £60,000.

What is Entrepreneurs' Relief (Business Asset Disposal Relief)?

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