R&D Tax Relief: Your questions answered

R&D tax relief is available to UK limited companies subject to Corporation Tax that undertake qualifying research and development activities. 

It applies across a wide range of sectors, including manufacturing, engineering, construction, life sciences, software and digital technology, with eligibility depending on the R&D projects undertaken during the year.

R&D tax relief can make a significant difference to your company’s cash flow and profitability.  

Depending on your company’s size and financial position, you may be able to: 

• Claim enhanced Corporation Tax deduction on qualifying expenditure 

• Receive a payable tax credit if your company is loss-making 

• Improve cash flow to reinvest in innovation and growth 

For accounting periods on or after 1 April 2024, the SME and RDEC schemes were merged into a single regime. 

The merged scheme offers a 20 per cent payable credit on qualifying expenditure. 

As the credit is taxable as trading income, the net benefit can be worth up to 16.2 per cent, depending on your Corporation Tax rate.  

To qualify for R&D tax relief, your project must: 

• Seek an advancement in science or technology 

• Contribute to overall knowledge in the field 

• Attempt to resolve scientific or technological uncertainty 

• Relate directly to your company’s trade 

• Have work undertaken in the relevant accounting period 

• Not be readily deducible by a competent professional 

An eligible advance may involve developing a new product, service, process or material or significantly improving an existing one.

ERIS provides additional support for loss-making SMEs that spend at least 30 per cent of total expenditure on R&D. 

Qualifying companies can claim: 

• An additional 86 per cent deduction when calculating trading losses 

• A payable tax credit of up to 14.5 per cent of relinquishable losses 

ERIS operates alongside the merged scheme but cannot be claimed for the same project. 

There is a 12-month grace period for R&D expenditure, meaning a company has to drop below 30 per cent for two consecutive years to no longer qualify for ERIS.  

Eligible costs can include: 

• Staff salaries, bonuses and Employer National Insurance contributions 

• Pension contributions 

• Consumables (materials, fuel, water) 

• Software and data licences 

• Cloud computing costs 

• Prototyping 

• Contractor and externally provided worker costs 

• Qualifying indirect activities linked to the project 

Capital expenditure and routine commercial production costs are not eligible. 

Yes, as long as they apply to the R&D work. Employment costs are often the largest part of a claim. 

Where employees work part-time on R&D, claims must be apportioned based on time spent on qualifying activities. This approach also applies to qualifying indirect activities. 

If your R&D project uses staff supplied by an employment agency, these individuals are classed as Externally Provided Workers (EPWs). 

For UK-based R&D: 

• Connected providers can claim up to 100 per cent of the lower of payment or cost incurred 

• Unconnected providers can claim 65 per cent of the staff provision payment 

Overseas R&D is generally restricted for accounting periods after 1 April 2024, unless the work must be carried out abroad due to environmental or geographical necessity. 

You need to notify HMRC in advance if you have never claimed before or have not claimed within the last three years. 

A notification must be submitted between the start of the accounting period and six months after it ends, making it important to seek specialist advice early in your R&D journey to ensure deadlines are met and opportunities are not missed. 

The AIF is mandatory for all R&D claims and it requires: 

• Company and contact details 

• Senior R&D contact information 

• Accounting period details 

• Breakdown of qualifying expenditure 

• Project descriptions 

The AIF must be submitted before or on the same day as your Company Tax return.

R&D tax claims require significant detail to be accepted and you will need to keep records of: 

• Detailed cost breakdowns 

• Payroll records 

• Contracts with subcontractors 

• Project documentation showing technical uncertainty 

• Supporting calculations 

An R&D tax enquiry, often known as a compliance check, is where HMRC investigates whether your R&D tax relief claim meets the government’s eligibility criteria. 

Enquiries often arise when an inspector suspects potential non-qualifying costs or projects that do not meet the definition of R&D. 

Some claims are also selected at random under HMRC’s Mandatory Random Enquiry Programme (MREP). 

Random selection cannot be avoided, but maintaining clear documentation and submitting a well-prepared, compliant claim can reduce the risk of prolonged investigations.