R&D Tax Relief

Research and Development (R&D) tax relief is a government incentive designed to encourage UK companies to invest in innovation. Depending on your company's size and circumstances, you can claim a super-deduction on qualifying R&D expenditure or receive a payable tax credit even if your company is loss-making. The rules underwent a significant overhaul from 1 April 2024 with the introduction of a merged R&D regime for all companies, although certain aspects of the SME and large company schemes remain for accounting periods commencing before that date. This guide covers the current landscape and how to prepare a robust claim.

RDEC — Research and Development Expenditure Credit

The RDEC (Research and Development Expenditure Credit) is the primary R&D relief for large companies and, since April 2024, also applies to loss-making SMEs that would previously have used the SME payable credit route. RDEC provides an above-the-line credit of 20% of the qualifying R&D expenditure. This credit is treated as taxable income, so the net benefit after Corporation Tax is approximately 15% (20% credit taxed at 25% Corporation Tax). The credit can be used to settle the company's Corporation Tax liability or, if the company is loss-making, can be surrendered for a cash payment (subject to a cap based on the company's PAYE and NIC liability). Companies with RDEC claims must disclose the credit in their statutory accounts.

SME R&D Relief (Pre-April 2024 and Transitional)

For accounting periods beginning before 1 April 2024, the SME R&D relief allows qualifying companies to claim an 86% enhanced deduction on qualifying R&D expenditure, meaning for every £100 spent on R&D, you can deduct £186 when calculating taxable profits. Loss-making SMEs can surrender the enhanced loss for a payable tax credit of 14.5% of the enhanced expenditure (effectively 14.5% of 186% = 27% of the actual R&D spend). From 1 April 2024, the merged scheme applies — most R&D-intensive loss-making SMEs must use the new RDEC-like structure, while profitable SMEs can still use the enhanced deduction but with a reduced rate. A company is R&D-intensive if its R&D expenditure represents at least 30% of total expenditure in the period.

Qualifying R&D Costs

R&D for tax purposes is defined broadly as a project that seeks to achieve an advance in science or technology — meaning the project must resolve scientific or technological uncertainty that is not readily deducible by a competent professional in the field. The qualifying costs include: staff costs (salaries, wages, employer NIC, pension contributions of staff directly engaged in R&D), consumables (materials, water, fuel, and power used directly in the R&D), software (licences and cloud computing costs used for R&D), subcontracted R&D (payments to subcontractors, subject to restrictions), and externally provided workers (agency staff engaged in R&D activities). Costs relating to the production and sale of goods or services (even if those goods/services are the product of the R&D) are not qualifying costs. Capital expenditure on plant and machinery used for R&D does not qualify for R&D relief but may attract 100% capital allowances.

Subcontracted R&D and Subsidised Expenditure

The treatment of subcontracted R&D depends on the relationship between the parties. If a large company subcontracts R&D to a third party, the large company's qualifying costs are limited to 65% of the payment to the subcontractor (with some exceptions). If an SME subcontracts work, the subcontractor costs are fully allowable provided the subcontractor is not an unconnected party carrying out the work on behalf of the SME. Subsidised expenditure — R&D costs met by a notifiable grant or subsidy — does not qualify for SME relief but can qualify under the RDEC scheme. This is a common area of error in claims, as many companies mistakenly claim relief on grant-funded R&D.

Making a Claim

R&D claims are made through the CT600 return. You must submit a R&D claim report with the return, prepared by a qualified accountant or tax adviser, detailing the R&D projects, qualifying costs, and the basis of the claim. Claims must be made within two years of the end of the accounting period. HMRC can open an enquiry into any R&D claim, and there are strict penalties for incorrect claims. Pre-notification is required for first-time claimants — you must tell HMRC within six months of the end of the accounting period that you intend to claim R&D relief. In recent years, HMRC has significantly increased scrutiny of R&D claims, and many claims are being challenged or rejected due to inadequate documentation. Keep detailed project records, timesheets, and cost breakdowns to support your claim.

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