Research and Development tax credits are one of the most generous tax reliefs available to UK businesses, yet many eligible companies never claim them. The scheme allows companies to reduce their tax bill — or even receive a cash payment from HMRC — based on their qualifying R&D expenditure.
Do You Qualify?
The definition of R&D for tax purposes is broader than most people expect. You do not need to be inventing something completely new or working in a laboratory. HMRC defines qualifying R&D as a project that seeks to achieve an advance in science or technology, faces scientific or technological uncertainty that a competent professional in the field could not easily resolve, and involves a systematic approach to overcoming that uncertainty.
In practice, this covers activities like developing new software features or algorithms, improving manufacturing processes, creating new materials or formulations, designing products that push beyond current capabilities, and solving engineering challenges that do not have obvious solutions.
How the Relief Works
Under the merged RDEC scheme (which replaced the separate SME and RDEC schemes from April 2024), companies receive an above-the-line credit of 20% of qualifying expenditure. This is then taxed at your corporation tax rate, giving a net benefit of approximately 15% for companies paying the 25% main rate, or 16.2% for companies paying the 19% small profits rate.
For loss-making companies, the credit can be surrendered for a cash payment from HMRC, providing vital funding for early-stage businesses that have not yet reached profitability.
What Expenditure Qualifies?
Qualifying expenditure includes staff costs for employees directly involved in R&D, consumable materials used in the R&D process, software licences used for R&D, and subcontractor costs (at a reduced rate). The largest component is usually staff costs, which includes salaries, employer NI, and pension contributions for staff working on qualifying projects.
Common Mistakes
The most common mistake is simply not claiming at all. Many businesses — particularly in construction, manufacturing, and professional services — undertake qualifying R&D without realising it. The second most common mistake is under-claiming, typically because businesses only include obvious R&D projects and miss the routine problem-solving work that also qualifies.
Use our R&D tax credits calculator to estimate your potential claim based on your qualifying expenditure.
M. Samiuddin QUADRI is a chartered certified accountant at Gladstone & Co. Accountants, helping businesses identify and claim R&D tax reliefs.