UK R&D tax credits can refund up to a quarter of qualifying spend on innovation projects, which is enough to fund another engineer for many small businesses. The scheme has been overhauled twice in recent years, and for accounting periods beginning on or after 1 April 2024 the SME and RDEC schemes have been merged into a single scheme. This guide takes you through eligibility, the new merged regime, and the HMRC compliance risks. For the wider context, see our tax and VAT hub, which links the company reliefs that interact with an R&D claim.
What qualifies as R&D
HMRC follows the BEIS guidelines: a project must seek an advance in science or technology through the resolution of scientific or technological uncertainty. The advance must benefit the field, not just your business. Examples include:
- New algorithms beyond the public state of the art
- Novel manufacturing processes that save material or energy
- Software systems that achieve performance not commercially available
- Bioscience research, drug formulation, or new materials
What does not qualify:
- Routine software development using known frameworks
- Aesthetic design changes
- Market research and customer testing
- Work in social sciences, arts or humanities
- Simply copying or reverse-engineering competitor products
The merged scheme
For accounting periods starting on or after 1 April 2024, most companies claim under a single regime broadly modelled on the old RDEC.
| Element | Merged scheme |
|---|---|
| Headline rate | 20% taxable credit on qualifying expenditure |
| Net benefit (post-CT) | 15% at the 25% main rate, 16.2% at the 19% small profits rate |
| Loss-making companies | Payable after notional tax at 19%, a net 16.2% |
| Cap | PAYE/NIC cap with £20,000 minimum buffer |
Loss-making R&D-intensive SMEs (at least 30% of total expenditure on R&D) keep enhanced relief equal to about 27% of qualifying spend.
Eligible costs
| Category | Includes |
|---|---|
| Staff costs | Gross pay, employer NIC, employer pension for project staff |
| Externally provided workers | Up to 65% of agency or umbrella charges |
| Subcontractors | Up to 65% of payments to UK-based subcontractors (post-1 April 2024 restriction) |
| Software and consumables | Including cloud computing and data licences |
| Utilities | Power, water, fuel consumed in the project |
| Clinical trials volunteers | Reimbursement payments |
Capital expenditure on assets used for R&D is claimed separately under capital allowances, specifically the R&D Allowance (RDA) at 100%.
Claim notification
For accounting periods beginning on or after 1 April 2023, new claimants (or those who have not claimed in the previous three years) must submit a claim notification form within six months of the period end. Miss this and the claim is barred regardless of merit.
Documentation HMRC expects
- Project narratives describing the advance and uncertainty
- Time sheets or apportionment calculations for staff
- Subcontractor and EPW evidence
- A nominated company officer signing the claim
- An agent reference if a third party assisted
The Additional Information Form has been mandatory since August 2023 and must be filed before the CT600 for any R&D claim to be valid.
HMRC enquiries
HMRC has dedicated R&D compliance teams and enquiry rates are high. Common reasons for rejection:
- Routine software work dressed up as R&D
- Claims that overlap with grant funding or subcontract payments
- Insufficient project narratives
- Inadequate apportionment of staff time
- Missing claim notification forms
Wrap-up
The merged regime simplifies the rate but tightens compliance. Read our existing R&D tax relief page for the underlying calculations, the tax tips for small businesses article for planning ideas, and check the HMRC R&D tax relief guidance for the current forms. See pricing if you want time-tracking and project costing built in.