Limited companies involved in research and development (R&D) activities may be able to claim different types of tax relief against their Corporation Tax bill. We’ll use this article to explain what you might be able to claim against your R&D activities, and how the system works.

Who can claim R&D tax relief?

You may be able to claim tax relief against your bill for Corporation Tax if your company spends money on research and development, such as creating new products, services, or processes – or enhancing existing ones.

The great thing about R&D tax relief is that any UK company of any size can claim. It doesn’t even matter if the R&D project itself ultimately failed in its objectives, or if the company makes a loss, as long as qualifying R&D work was undertaken by a limited company registered for Corporation Tax.

What R&D costs can I claim for?

The scope of eligible projects and costs is huge, spanning just about every industry. The key thing here is that your innovation must have involved some kind of scientific or technical uncertainty. It should also benefit the wider field in which your company operates, not just your company itself.

Each R&D project is unique and so are the eligible costs. As a guide these are the most common ones for inclusion:

• Staff wages, overtime payments and salaries
• Employer NIC contributions
• Costs relating to subcontractors, freelancers and externally provided workers (EPWs)
• Payments made to volunteers for any clinical trials
• Certain types of software (which were specifically designed for the R&D project itself, not bought ‘off the shelf’)
• Consumables (including heat, electricity, and water)

Bear in mind this isn’t an exhaustive list, which is why it’s well worth seeking advice if you’re thinking of starting an R&D tax relief claim. Innovative companies working in creative industries may also be able to claim creative sector tax reliefs too.

Can I still claim R&D tax relief if the project is unsuccessful?

Yes, even if the project ultimately fails, you can still claim tax relief on costs relating to the research and innovation that went into the developmental process.

Claiming R&D relief for overseas workers and subcontractors

You won’t be able to claim for R&D work carried out by externally provided workers (EPWs) or subcontractors who are located abroad, although there are a few exceptions if the work is classed as ‘qualifying overseas expenditure’ (QOE). For example, if it was unreasonable for the R&D work to be undertaken in the UK because (to use HMRC’s example) it involved placing sensors on a volcano.

How does R&D tax relief work?

A successful R&D claim for profit-making companies will be applied as a credit against your bill for Corporation Tax, reducing the amount you need to pay. Loss-making organisations can receive cash payments instead.
 

Claiming R&D tax relief for accounting periods which started before 1st April 2024

To claim R&D tax relief for accounting periods which started before April 2024 you’ll need to apply to the correct scheme depending on your eligibility:
 

 
The SME scheme is aimed at smaller businesses whose limited funding might mean they need a bit more financial support to carry out R&D activities. As such, the maximum rate of relief available through the SME R&D scheme is higher than what’s available through the RDEC scheme, which is aimed at larger, more established companies.

 
The RDEC scheme is what’s known as an ‘above the line’ scheme, so any tax credit you receive will be shown as a source of income and therefore subject to Corporation Tax. The SME scheme is ‘below the line’ so you won’t pay tax on this type of credit.

How much can I claim through the SME R&D scheme?

The SME scheme allows companies to claim tax relief on R&D using an ‘additional deduction rate’. This means you can:

• Deduct 100% of the amount which you spend on R&D (like you would when claiming allowable expenses)
• And then deduct a percentage of that amount again

For example, the additional deduction rate is 86%. A company with spending which qualifies for R&D relief can deduct 100% of the amount from its profits, and then deduct a further 86% of the amount, to make a total 186% deduction.

Claiming if your company makes a loss and you use the SME scheme

You might also be able to claim a payable tax credit alongside this relief if your company makes a loss:

• 10% of the surrenderable loss, or;
• 14.5% of the surrenderable loss if the company is considered research intensive

Your company may be considered ‘research intensive’ if it’s an SME, and the amount it spends on qualifying R&D activities accounts for 30% or more of its expenditure in a claim period after April 2024. Your R&D spending needs to account for 40% or more of your company’s allowable expenditure if you’re claiming for a period before that.

How much you can claim through the RDEC scheme

Research and Development Expenditure Credit (RDEC) is a tax credit applied against the company’s tax bill. The expenditure credit rate is worked out as a percentage of what you spend on R&D.
 

 
For example, if you spent £100,000 on R&D between 1st April 2023 and 31st March 2024, you can claim 20% of it back – which is £20,000.

Just remember; RDEC is an above-the-line credit. ‘Above the line’ means the credit is accounted for in your bookkeeping as if it were income – a bit like a grant – so you’ll pay Corporation Tax on it.

But what about the RDEC rates for 2025 onwards? Well this is where the rules changed, so claiming R&D relief looks a bit different from 1st April 2024.

Claiming R&D tax relief for accounting periods starting after 1st April 2024

For accounting periods starting 1st April 2024 onwards the previous SME and RDEC schemes are replaced by a single, merged R&D expenditure credit (RDEC) scheme. It’s still an ‘above the line’ scheme, so you’ll still pay Corporation Tax on the credit as if it were income.

The tax relief must be claimed by the company which decides R&D work needs to be carried out. If you’re a contractor carrying out R&D work for a customer then you’ll only be able to claim your costs as an allowable expense in the normal way (unless you can prove your company decided the R&D was needed and you planned the work).

Companies may be entitled to credit at a rate of 20%, or at a rate of 19% if they make a loss or their profits are less than £50,000.

Companies which make a loss might also be able to claim Enhanced Research and Development intensive support.

Enhanced R&D intensive support for small businesses

This enhanced support is only available to companies which qualify as SMEs, make a loss, and are considered to be ‘research intensive’ because 30% or more of their spending relates to R&D.

There is a grace period allowing companies to continue receiving relief for one year even if their R&D spending dips below the 30% threshold.

What can I get for enhanced R&D intensive support?

Enhanced R&D intensive support is pretty much what was available to SMEs before the R&D schemes were merged. Companies which qualify for enhanced support claims in accounting periods beginning on or after 1st April 2024 can:

• Deduct an extra 86% of their qualifying costs (on top of the normal 100% you can already claim as an expense, giving you a total deduction of 186%)
• Claim a payable tax credit (which isn’t liable to tax) worth up to 14.5% of the surrenderable loss

Is there a deadline for claiming R&D tax credit relief?

You can claim tax relief on R&D up to two years after the end of the accounting period the claim relates to.

For example, the deadline to submit an R&D tax credit claim for an accounting period which runs from 1st April 2024 to 31st March 2025 is midnight on 31st March 2027.

How do I apply for R&D tax relief?

 
The Claim Notification for R&D is basically a pre-notification which tells HMRC you plan to make a claim for R&D for that accounting period. If this is your first time claiming R&D relief, or if you haven’t submitted a claim for R&D in the last three years, you’ll need to use a digital service to pre-notify HMRC you plan to claim.

When to send your pre-notification

The Claim Notification can be sent from the first day of the accounting period it relates to, but the deadline to submit is 6 months from the end of the period. You can enter the details of any qualifying R&D expenditure into your Company Tax Return.

If you operate multiple companies or work with various partners, it’s essential the UTR number and accounting period details on your Claim Notification are the same as on your CT600 Company Tax Return.

What you need for an R&D claim

The Corporate Intangibles Research and Development (CIRD) Manual is a good place to start, because it sets out the general rules and eligibility around R&D tax relief. It can also be a bit overwhelming, so you might need an accountant who specialises in R&D – not everyone does!

Explaining the project

Your claim must describe the project and its associated costs in a way which makes it clear why you’re claiming R&D relief. Describe why the specific challenges faced in a particular field led to the work being undertaken, and how the project attempted to overcome these challenges and uncertainties.

You must also include the contact details of the main person leading the R&D project, along with the details of any professional firms or individuals who helped you prepare your R&D claim. You’ll also need to detail how many externally provided workers were involved in the R&D project, together with their PAYE scheme reference numbers.

Provide a complete breakdown of eligible project costs under the following headings:

• Cloud computing services and data licences
• Contributions to independent R&D
• Correct SIC code
• What costs are the result of eligible indirect activities
• How many projects make up your claim

 
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