R&D Tax Relief for Small Businesses
R&D tax relief allows small and medium businesses to claim additional tax deductions or credits for qualifying research and development expenditure. This guide covers eligibility, qualifying costs, and how to make a claim.
What Is R&D Tax Relief?
R&D tax relief is a government incentive that rewards UK companies for investing in innovation. It allows businesses to claim additional corporation tax deductions or cash credits for expenditure on qualifying research and development activities.
The relief is administered by HMRC and governed by the Corporation Tax Act 2009. It is available to any UK limited company that carries out qualifying R&D work, regardless of sector or size.
The Merged R&D Scheme (From April 2024)
From 1 April 2024, the previous SME scheme and RDEC scheme were merged into a single merged R&D scheme. The key features are:
| Feature | Merged Scheme |
|---|---|
| Enhanced deduction | 86% above-the-line credit on qualifying expenditure |
| Effective tax benefit (profit-making, 25% CT rate) | 21.5% of qualifying spend |
| Effective tax benefit (profit-making, 19% CT rate) | 16.34% of qualifying spend |
| Loss-making companies | Can surrender losses for a payable credit at 10% |
This means for every £100 of qualifying R&D expenditure, a profit-making company paying the 25% corporation tax rate saves £21.50 in tax.
R&D Intensive SMEs
R&D intensive companies — where qualifying R&D expenditure is 30% or more of total expenditure — can access an enhanced rate. Loss-making R&D intensive SMEs receive a payable credit of 14.5% on qualifying expenditure, providing more generous support than the standard merged scheme.
What Qualifies as R&D?
HMRC follows the guidelines published by the Department for Science, Innovation and Technology (DSIT). A project qualifies if it seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty.
The Five Criteria
To qualify, the project must:
- Seek an advance in overall knowledge or capability in science or technology
- Involve scientific or technological uncertainty — it must not be obvious to a competent professional how to achieve the advance
- Attempt to overcome the uncertainty through a systematic approach
- Not be readily deducible by a competent professional working in the field
- Relate to the company’s trade (either existing or intended)
What Counts and What Does Not
| Qualifies | Does Not Qualify |
|---|---|
| Developing new products or processes | Routine product development with no uncertainty |
| Improving existing technology through innovation | Cosmetic or aesthetic changes |
| Creating new software with technical challenges | Using existing software without modification |
| Developing new materials or compounds | Applying existing techniques in a standard way |
| Overcoming technical limitations | Market research or commercial development |
| Prototyping where uncertainty exists | Work already done by others and publicly available |
Qualifying Expenditure
Not all costs associated with an R&D project qualify. The main categories of qualifying expenditure are:
Staff Costs
- Salaries, wages, and bonuses of employees directly involved in R&D
- Employer National Insurance contributions
- Employer pension contributions
- The apportioned cost of staff who split time between R&D and other activities
Consumables
- Materials and components used or transformed in R&D
- Utilities (power, water, fuel) consumed in R&D activities
- Software licences used for R&D purposes
Externally Provided Workers
- Payments to staff agencies or third-party providers for workers engaged in R&D
- Under the merged scheme, 65% of payments for externally provided workers qualify
Subcontracted R&D
- Payments to subcontractors carrying out R&D on the company’s behalf
- Under the merged scheme, 65% of subcontracted R&D costs qualify
Clinical Trial Volunteers
- Payments to volunteers participating in clinical trials
Software and Cloud Computing (From April 2023)
- Costs of cloud computing and data licences used in R&D activities
How to Claim
Step 1: Identify Qualifying Projects
Review your activities to determine which projects involved seeking an advance in science or technology through resolving uncertainty.
Step 2: Calculate Qualifying Expenditure
Apportion costs between qualifying R&D activities and non-qualifying work. Staff who spend part of their time on R&D should have their costs apportioned accordingly.
Step 3: Prepare Supporting Documentation
From 8 August 2023, all new R&D claims require an Additional Information Form submitted to HMRC before the corporation tax return. This must include:
- A description of each qualifying R&D project
- The advance sought and the uncertainty being resolved
- A breakdown of qualifying expenditure by category
- Details of any agent involved in the claim
Step 4: Include in Corporation Tax Return
The claim is made on the CT600 corporation tax return, with the relevant R&D supplementary pages completed. The claim must be filed within 2 years of the end of the accounting period.
Practical Examples
Software Company
A UK software company develops a new algorithm to process large datasets in real time. The technical challenge of processing speed at this scale constitutes scientific uncertainty. Staff costs, cloud computing costs for testing, and materials used during development all qualify.
Manufacturing Business
A manufacturer attempts to develop a new composite material that is lighter and stronger than existing options. The uncertainty lies in whether the material can achieve the required properties. Lab costs, materials consumed in testing, and staff time on the project qualify.
Engineering Firm
An engineering company designs a bespoke machine to automate a process that has never been automated before. The uncertainty is whether the mechanical approach will work reliably. Design staff costs, prototype materials, and subcontractor costs for specialist components qualify.
Common Mistakes in R&D Claims
- Claiming for routine development that does not involve genuine technological uncertainty
- Failing to apportion staff costs where employees work on both R&D and non-R&D activities
- Not keeping adequate records to support the claim
- Missing the deadline — claims must be filed within 2 years of the accounting period end
- Confusing commercial uncertainty with technological uncertainty — market risk does not qualify
- Overlooking qualifying expenditure such as consumables or cloud computing costs
Record Keeping
HMRC can enquire into R&D claims for up to 12 months after the filing date. You must maintain:
- Project descriptions linking to the DSIT guidelines
- Time records showing staff involvement in R&D
- Invoices and receipts for qualifying expenditure
- Technical documentation demonstrating the uncertainty and approach taken
- Board minutes or management records approving R&D activities
Accurate accounting records are essential. Your accounting system should allow you to identify and segregate R&D expenditure from other business costs.
Interaction with Other Reliefs
R&D tax relief interacts with several other tax-deductible expenses and reliefs:
- Capital allowances — expenditure claimed as R&D cannot also be claimed as a capital allowance
- Patent Box — companies with patents arising from R&D can benefit from a reduced 10% corporation tax rate on patent profits
- Grant funding — R&D expenditure funded by notified state aid may be subject to different rules under the merged scheme
- Corporation tax losses — enhanced R&D deductions can create or increase trading losses, which can be carried back or forward