Key facts
- From April 2024, most R&D claims use the merged RDEC scheme with a 20% credit rate.
- R&D-intensive loss-making SMEs can claim a higher 27% rate under the enhanced scheme.
- Qualifying expenditure includes staff costs, subcontractors, software, and consumables.
- The project must seek an advance in science or technology, not just be innovative commercially.
- Claims are made through the Corporation Tax return (CT600).
What Is R&D Tax Relief?
R&D tax relief allows UK companies to claim a Corporation Tax deduction (or cash credit) for expenditure on qualifying research and development projects. It is one of the most valuable reliefs available, yet many companies fail to claim because they do not realise their work qualifies.[1]
The Merged RDEC Scheme (From April 2024)
From 1 April 2024, the previous SME scheme and RDEC scheme were merged into a single merged RDEC scheme for most companies. Key features:[2]
| Feature | Merged RDEC | Enhanced (R&D-Intensive SMEs) |
|---|---|---|
| Credit rate | 20% | 27% |
| Taxable? | Yes (above the line) | No (payable credit for losses) |
| Net benefit (25% CT payer) | ~15% of qualifying spend | ~27% (as cash credit) |
| Eligibility | All companies | Loss-making SMEs with R&D ≥ 30% of total expenditure |
What Qualifies as R&D?
A qualifying R&D project must:[3]
- Seek an advance in science or technology (not in social sciences, arts, or humanities)
- Involve technological uncertainty — the solution is not readily deducible by a competent professional
- Attempt to overcome the uncertainty through systematic investigation
Common Qualifying Activities
- Developing new products, processes, or services
- Improving existing products or processes beyond the current state of the art
- Software development involving novel algorithms or architectures
- Engineering projects that solve challenging technical problems
- Creating prototypes or pilot plants
Common misconception: You do not need to be in a lab or wear a white coat. Many IT, engineering, manufacturing, and construction companies undertake qualifying R&D without realising it. The key test is whether you are resolving technological uncertainty.
Qualifying Expenditure
| Cost Type | What Qualifies |
|---|---|
| Staff costs | Salary, NI, and pension contributions for employees directly involved in R&D |
| Subcontractors | 65% of payments to unconnected subcontractors (or externally provided workers) |
| Software | Software licences used directly in R&D activities |
| Consumables | Materials, utilities, and items consumed or transformed in R&D |
| Cloud computing | Data, computing, and cloud costs directly attributable to R&D (from April 2023) |
How to Claim
- Identify qualifying projects and expenditure
- Calculate the qualifying expenditure for the accounting period
- Prepare a technical narrative describing the technological advance and uncertainty
- Submit a claim notification to HMRC (required before claiming, for periods from 1 April 2023)
- Include the claim in your CT600 Corporation Tax return
Tip: Keep contemporaneous records of R&D activities as you go. HMRC increasingly scrutinises R&D claims, and retrospective documentation is harder to compile and less convincing. Record what the uncertainty was, what you tried, and what the outcome was.
Worked Example
A software company spends £200,000 on developer salaries for qualifying R&D in 2025/26:
| Item | Amount |
|---|---|
| Qualifying R&D expenditure | £200,000 |
| RDEC credit (20%) | £40,000 |
| Less: Corporation Tax on credit (25%) | −£10,000 |
| Net benefit | £30,000 |
Frequently Asked Questions
What counts as R&D for tax purposes?
R&D for tax purposes means a project that seeks to achieve an advance in overall knowledge or capability in science or technology. The advance must not be readily deducible by a competent professional in the field. It covers resolving scientific or technological uncertainty, not routine development or commercial innovation alone.
Can small companies still claim the SME scheme?
From 1 April 2024, the separate SME and RDEC schemes merged into a single merged RDEC scheme for most companies. However, R&D-intensive loss-making SMEs (where qualifying R&D expenditure is at least 30% of total expenditure) can claim the enhanced R&D intensive scheme at a higher rate.
How much is the R&D tax credit worth?
Under the merged RDEC scheme, the credit is 20% of qualifying expenditure. For a profitable company paying 25% CT, the net benefit is approximately 15% of qualifying spend. For loss-making R&D-intensive SMEs, the enhanced scheme provides a 27% credit rate.
Can sole traders claim R&D tax relief?
No. R&D tax relief is only available to companies paying Corporation Tax. Sole traders and partnerships cannot claim it, which may be an additional reason to incorporate if you undertake significant R&D.
Further Reading
- Capital Allowances & Timing — other ways to reduce taxable profits
- Choosing a Business Structure — R&D relief as a reason to incorporate
- Loss Utilisation Strategies — using R&D losses effectively
- Growing a Business: Tax Considerations — R&D as part of your growth strategy
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