R&D Tax Credits Explained
A comprehensive guide to understanding R&D tax relief in the UK - what it is, who qualifies, and how to claim.
Source: HMRC R&D Tax Credit Statistics 2023-24
What are R&D Tax Credits?
R&D tax credits are a UK government incentive designed to reward private sector innovation. Companies can claim annually based on their qualifying R&D expenditure, receiving significant financial benefits.
For profitable companies, R&D tax relief reduces your Corporation Tax bill. For loss-making companies, you can receive either additional carried-forward losses or, in many cases, a cash payment from HMRC.
The scheme is available to any UK company paying Corporation Tax, including limited companies (LTD), public limited companies (PLC), community interest companies (CIC), and overseas companies with a UK branch or presence.
Do You Qualify?
To qualify for R&D tax relief, your project must meet two key criteria established by HMRC:
Seeking a Technological Advance
Your project must seek to achieve an advance in overall knowledge or capability in a field of science or technology. This means adding to the technical knowledge in your industry through development or appreciable improvement.
Resolving Technological Uncertainty
There must be technological uncertainty that could not be easily resolved by a competent professional in the field. The solution should not be publicly available or readily deducible.
Important: Your project doesn't need to succeed to qualify. Failed R&D projects are still eligible - what matters is that you attempted to resolve genuine technological uncertainty.
How Much Can You Claim?
Merged Scheme (April 2024+)
Net benefit for companies paying 25% Corporation Tax. You receive a taxable 20% R&D expenditure credit, giving a net benefit of approximately 15-16.2% depending on your tax position.
ERIS (R&D Intensive SMEs)
For loss-making SMEs with 30%+ R&D intensity (R&D spend as a proportion of total expenditure), the Enhanced R&D Intensive Support scheme provides significantly higher benefits.
Claims are submitted alongside your Corporation Tax return at year-end. You can also make retrospective claims for the two preceding accounting periods if you haven't already claimed for them.
What Costs Qualify?
Eligible Costs
- Staff salaries (directly engaged in R&D)
- Employer's NIC and pension contributions
- Subcontractor costs (65% qualifying)
- Externally provided workers (65%)
- Consumables (materials, utilities, prototypes)
- Software licences used in R&D
- Cloud computing costs (from 1 April 2023)
- Data licences for R&D (from 1 April 2023)
Ineligible Costs
- Capital expenditure
- Recruitment costs
- Production costs (after R&D complete)
- General overheads (rent, non-R&D hosting)
- Dividend payouts
- Patent costs
Note on cloud computing and data costs: From 1 April 2023, cloud computing costs and data licences used directly in R&D activities became qualifying expenditure under the Finance (No. 2) Act 2023.
R&D Examples by Sector
R&D tax relief isn't just for traditional "lab coat" research. Many everyday business activities involve qualifying R&D. Here are examples from key sectors:
Manufacturing
- Prototyping new products or components
- Testing and developing new materials
- Improving manufacturing processes
- Developing automated production systems
- Creating bespoke machinery or tooling
Software Development
- Developing novel algorithms or methodologies
- System integration challenges
- Scalability and performance solutions
- Data processing innovations
- AI and machine learning development
Architecture
- Non-typical structural designs
- Thermal and environmental design challenges
- Complex retrofitting projects
- Sustainable building innovations
- Novel construction methodologies
Engineering
- Aerospace component development
- Civil engineering innovations
- Petroleum and energy engineering
- Materials science research
- Mechanical system improvements
The Claims Process
Our streamlined process makes claiming R&D tax relief straightforward. Here's how we work with you:
Eligibility Confirmation
We assess your projects to confirm they meet HMRC criteria for R&D tax relief.
Data Collection
We gather technical and financial information about your R&D activities.
Cost Separation
We identify and separate eligible R&D expenditure from non-qualifying costs.
Contract Review
We review subcontractor and worker arrangements to maximise your claim.
Technical Narrative
We write a compelling technical report explaining your R&D activities.
Documentation
We prepare all supporting documentation required by HMRC.
Submission
We submit your claim with your Corporation Tax return.
Payment
HMRC typically processes claims within 28 days of submission.
Timeline
Once submitted, HMRC typically processes R&D tax credit claims within 28 days. The time required from your team is usually around half a day for technical staff and half a day for finance - we handle everything else.
Important: CNF Deadline
Since April 2023, first-time claimants (or those who haven't claimed in the previous 3 years) must submit a Claim Notification Form (CNF) within 6 months of their accounting period end. Miss this deadline and you lose your claim entirely - there are no exceptions.
Check Your CNF DeadlineFrequently Asked Questions
Do I qualify for R&D tax credits?
If your projects involve developing new or improved products, processes, or services while facing technical challenges, you may qualify - regardless of sector or whether the project succeeded.
How much can I claim?
Under the merged scheme (from April 2024), companies receive a 20% gross R&D expenditure credit. The net benefit is typically 15-16.2% of qualifying spend after Corporation Tax.
Can I claim for subcontracted work?
Yes, but only 65% of subcontractor expenditure counts as qualifying spend. The work must be directly related to your R&D activities.
Can I claim for R&D done overseas?
R&D activities can take place globally, but overseas work generally falls under the subcontracted R&D category with the 65% restriction.
What is the SME definition?
An SME has 500 or fewer employees and either under €100 million annual revenue or under €86 million balance sheet total.
Can I claim retrospectively?
Yes, you can claim for the two previous accounting periods if you haven't already claimed for them.
How much time does it take?
Typically around half a day of technical staff time and half a day of finance team time to provide the information we need.
What about HMRC enquiries?
Risk is minimised through specialist preparation. Key risk factors include poor documentation and claims prepared by unqualified advisers.
Should I prepare the claim myself?
While possible, self-prepared claims are often smaller, risk 25% penalties if incorrect, and consume significant staff time. Specialist advisers typically deliver better results.
Do grants affect my R&D claim?
Notifiable state aids for a specific project preclude R&D claims for that project. Other grant types may allow partial claims - we can advise on your specific situation.
Ready to Claim?
Get a free assessment of your potential R&D tax credit claim from our specialists.
Get Free AssessmentCNF CalculatorOn This Page
Ready to Claim Your R&D Tax Relief?
Get a free, no-obligation assessment of your potential R&D tax credit claim. Our specialists will review your projects and identify qualifying activities.