What are R&D tax credits?

R&D tax credits are a government tax incentive that rewards UK companies for investing in innovation. If your company spends money on research and development — developing new products, processes, or services, or improving existing ones — you can claim a tax relief that reduces your corporation tax bill or provides a cash credit. From April 2024, the merged R&D scheme applies to most companies, offering a 20% above-the-line credit on qualifying R&D expenditure.

Does my business qualify for R&D tax credits?

To qualify, your company must be a UK limited company paying corporation tax and undertaking projects that seek an advance in science or technology. The work must involve overcoming scientific or technological uncertainty — something that isn't readily deducible by a competent professional in the field. You don't need to succeed, and the advance doesn't need to be ground-breaking — it just needs to push beyond existing knowledge or capability. Common qualifying sectors include software, engineering, manufacturing, food and drink, construction, and pharmaceuticals.

How much can I claim in R&D tax credits?

Under the merged R&D scheme (from April 2024), the above-the-line credit is 20% of qualifying R&D expenditure. For a profit-making company paying 25% corporation tax with £100,000 of qualifying R&D spend, the net benefit is approximately £15,000 (20% credit less 25% corporation tax on the credit). For loss-making companies, the credit can be surrendered for a cash payment. R&D-intensive SMEs (R&D spend is 30%+ of total expenditure) get enhanced benefits — a higher payable credit rate of 27%.

How do I claim R&D tax credits?

R&D tax credits are claimed through your corporation tax return (CT600). You need to: identify qualifying R&D projects, calculate qualifying expenditure (staff costs, subcontractors, consumables, software, etc.), complete the R&D section of the CT600, submit a technical report describing the R&D activities, and file the claim within 2 years of the end of the accounting period. Many businesses use specialist R&D tax advisers — they typically charge 15–30% of the successful claim value but can significantly increase the claim amount.

R&D Tax Credits Guide UK — How Small Businesses Can Claim | PocketWise

R&D tax credits can be worth thousands for innovative UK businesses. Here’s how to check if you qualify and how to claim.

At a Glance

Feature	Detail
What they are	Tax incentive for companies investing in research and development
Who can claim	UK limited companies paying corporation tax
Merged scheme rate (from April 2024)	20% above-the-line credit on qualifying R&D spend
R&D-intensive SME rate	27% payable credit for loss-making R&D-intensive companies
Claim deadline	2 years after the end of the accounting period
How to claim	Via corporation tax return (CT600)

The Merged R&D Scheme (From April 2024)

Feature	Detail
Applies to	Most companies (SMEs and large companies)
Credit rate	20% of qualifying R&D expenditure
How it works	Credit goes through the P&L as income, then corporation tax is paid on it
Net benefit (25% CT rate, profit-making)	~15% of qualifying spend
Net benefit (19% CT rate, if applicable)	~16.2% of qualifying spend
Loss-making companies	Can surrender the credit for a cash payment (at a lower rate)

R&D-Intensive SMEs

Feature	Detail
Who qualifies	SMEs where R&D spend is 30%+ of total expenditure
Benefit	Enhanced payable credit rate of 27% (for loss-making companies)
Why it matters	Higher cash benefit for pre-revenue companies spending heavily on R&D

What Qualifies as R&D?

The project must…	Detail
Seek an advance in science or technology	New knowledge, new capability, or a new/improved product, process, or service
Overcome technological uncertainty	The solution wasn’t readily deducible by a competent professional
Relate to your company’s trade	The R&D must be relevant to your business (current or intended)
Not be routine work	Standard engineering, cosmetic design changes, or social science don’t qualify

What Counts as R&D

Qualifies	Doesn’t qualify
Developing new software functionality	Routine software updates or bug fixes
Creating new manufacturing processes	Implementing off-the-shelf solutions
Overcoming engineering challenges	Aesthetic or cosmetic design
Developing new materials or formulations	Market research
Improving energy efficiency through new tech	Social science or economics research
Prototyping and testing	Commercial or financial innovation
Failed projects (you tried but it didn’t work)	Work where the solution was already known

Common Qualifying Sectors

Sector	Example R&D activities
Software/tech	New algorithms, AI/ML development, bespoke software platforms, cybersecurity
Engineering	New product design, process automation, materials testing
Manufacturing	Production line innovation, new materials, quality improvement
Construction	Novel building techniques, structural challenges, energy-efficient design
Food & drink	New recipes overcoming preservation challenges, alternative ingredients
Pharmaceuticals	Drug development, clinical trials, formulation challenges
Agriculture	New farming techniques, crop science, environmental innovation
Aerospace/automotive	Component design, emissions reduction, lightweight materials

Qualifying Expenditure

Cost type	What’s included
Staff costs	Salaries, NI, pension contributions for employees working on R&D
Subcontractor costs	Payments to subcontractors for R&D work (65% of cost for unconnected parties)
Externally provided workers	Agency staff working on R&D (65% of cost)
Consumables	Materials and utilities consumed or transformed in R&D
Software	Licences for software used directly in R&D
Data and cloud computing	Data licences and cloud computing costs directly attributable to R&D

What You Can’t Claim For

Non-qualifying costs
Capital expenditure (equipment, buildings) — claim via capital allowances instead
Patent costs
Land and rent
Production of goods and services (post-R&D)
Admin and support costs not directly related to R&D

Worked Examples

Profit-Making Company

Item	Amount
Qualifying R&D expenditure	£100,000
Merged scheme credit (20%)	£20,000
Corporation tax on the credit (25%)	-£5,000
Net tax benefit	£15,000

Loss-Making Company (Not R&D Intensive)

Item	Amount
Qualifying R&D expenditure	£100,000
Merged scheme credit (20%)	£20,000
Payable credit (limited by tax notional charge)	Up to ~£16,000 cash

Loss-Making R&D-Intensive SME

Item	Amount
Qualifying R&D expenditure	£100,000
Enhanced credit rate	27%
Cash credit	£27,000

How to Claim

Step	Detail
1	Identify qualifying projects — what R&D did you undertake?
2	Calculate qualifying expenditure — staff, subcontractors, consumables, software
3	Prepare a technical report — describe the advance sought, the uncertainty, and how you tried to resolve it
4	Complete the CT600 — fill in the R&D boxes in your corporation tax return
5	Submit additional information form — required from August 2023 onwards
6	Submit to HMRC — within 2 years of the end of the accounting period

Using an R&D Adviser

Factor	Detail
Typical fee	15–30% of the successful claim (or fixed fee: £3,000–£10,000+)
What they do	Identify qualifying activities, maximise expenditure, prepare the technical report, handle HMRC queries
Is it worth it?	Often yes — especially for first claims. They typically identify more qualifying spend than you’d find yourself
Choosing an adviser	Look for CIOT/ATT qualifications, R&D-specific experience, no “no-win no-fee” upfront fees, transparent pricing

HMRC Compliance and Enquiries

Feature	Detail
Additional Information Form	Required for all claims from 1 August 2023 — must be submitted before or with the CT600
HMRC scrutiny	R&D claims are subject to increasing HMRC enquiry rates
Common reasons for enquiry	Large claims, vague technical descriptions, unusual expenditure patterns, first-time claims
How to protect yourself	Keep detailed records, ensure technical descriptions are specific and evidence-based, use a qualified adviser
Penalty for incorrect claims	Tax repayment + interest + potential penalties (up to 100% of overclaimed tax)

Common Mistakes

Mistake	Consequence
Not claiming at all	Many qualifying companies don’t realise they’re eligible
Claiming for routine work	HMRC rejects the claim
Poor technical narrative	Claim rejected or enquired into
Missing the 2-year deadline	Claim lost entirely
Not keeping records	Can’t support the claim if HMRC enquires
Over-claiming subcontractor costs	Must apply the 65% restriction for unconnected parties
Forgetting the additional information form	Claim is invalid without it

R&D Tax Credits Guide UK — How Small Businesses Can Claim

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