R&D Tax Credits for UK Small Businesses 2026
R&D tax credits let UK companies reduce their corporation tax bill — or receive a cash payment — for spending on qualifying research and development. From April 2024, HMRC replaced the old SME and RDEC schemes with a single merged R&D scheme, simplifying the rules for most businesses. If your company is working to solve a scientific or technological uncertainty, there is a good chance some of that work qualifies.
The Merged R&D Scheme: What Changed in April 2024
Before April 2024, there were two separate relief schemes:
- SME R&D Relief — for companies with fewer than 500 staff and a turnover under €100m or balance sheet under €86m.
- Research and Development Expenditure Credit (RDEC) — primarily for large companies and those that had received grants.
For accounting periods beginning on or after 1 April 2024, most companies now use the single merged scheme. The merged scheme works like the old RDEC: the credit is treated as above-the-line income, making its value more visible in your accounts. A separate, more generous scheme — the Enhanced R&D Intensive Support (ERIS) scheme — applies to loss-making SMEs that are R&D-intensive (see below).
What Counts as R&D?
HMRC uses the Guidelines on the Meaning of Research and Development (the "guidelines"), which are based on the Department for Science, Innovation and Technology definition. The key test is whether your project seeks to achieve an advance in overall knowledge or capability in a field of science or technology by resolving a scientific or technological uncertainty.
R&D does not have to involve white-coat laboratory work. Software development, engineering, manufacturing processes, and agricultural techniques can all qualify — provided the uncertainty is genuine and not simply a matter of applying existing knowledge.
Examples of qualifying activity
- Writing software algorithms that solve a problem no existing solution handles
- Developing a new material or formulation with unknown properties
- Designing novel manufacturing processes to achieve a performance specification that is not currently achievable
- Trialling new product architectures where the outcome is genuinely uncertain
What does NOT qualify
- Routine testing, quality control, or bug-fixing of known approaches
- Market research or aesthetic design work
- Applying commercially available technology without scientific uncertainty
- Management of business change processes
Qualifying Expenditure
You can only claim on costs that are directly attributable to qualifying R&D activity. From April 2024, subcontractor and externally provided worker (EPW) costs are restricted to UK-based work in most cases (with limited exceptions for overseas work where it is not reasonably practicable to carry out the work in the UK).
| Cost category | Claimable? | Notes |
|---|---|---|
| Staff wages, NIC & pension contributions | Yes | Apportion to time spent on R&D |
| Subcontractor costs (UK) | 65% of cost | Must be UK-based under merged scheme (with exceptions) |
| Consumables (materials, power, water) | Yes | Must be used or transformed in the R&D process |
| Software licences | Yes | Only the proportion used in R&D |
| Cloud computing costs | Yes | Added as qualifying cost from April 2023 |
| Data licences | Yes | Added as qualifying cost from April 2023 |
| Rent, general overheads, capital expenditure | No | Not qualifying expenditure |
How Much Can You Claim?
Under the merged scheme, qualifying companies receive an above-the-line credit of 20% of qualifying R&D expenditure. After the 25% corporation tax rate, the net benefit to a profitable company works out at roughly 15p in every £1 spent on R&D.
Enhanced R&D Intensive Support (ERIS)
Loss-making SMEs where R&D expenditure represents at least 30% of total expenditure can claim under ERIS instead. The ERIS credit rate is 45%, and qualifying companies can surrender the credit for a cash payment at a rate of 14.5% — meaning a cash repayment of up to 27p per £1 of qualifying spend. This is designed to support genuinely R&D-intensive start-ups and scale-ups that are pre-profit.
| Scheme | Credit rate | Benefit (profitable co.) | Cash repayment rate (loss-making) |
|---|---|---|---|
| Merged scheme | 20% | ~15p per £1 | Up to 16.2p per £1 |
| ERIS (R&D-intensive SMEs) | 45% | N/A (loss-making only) | Up to 27p per £1 |
How to Make a Claim via Your CT600
R&D tax credits are claimed as part of your Company Tax Return (CT600). The process involves several steps:
- Prepare a technical narrative. Document each R&D project: what scientific or technological uncertainty existed, what work was done to resolve it, and why the solution was not readily deducible from existing knowledge. This does not need to be submitted with the return, but HMRC can request it during an enquiry.
- Calculate qualifying expenditure. Identify staff costs, subcontractor costs, consumables, and software costs that directly relate to the qualifying R&D activity. Keep contemporaneous records (timesheets, project logs, invoices).
- Submit an Additional Information Form (AIF). Since August 2023, you must submit an AIF to HMRC before or at the same time as the CT600. The AIF requires a description of the R&D projects and the qualifying costs. It is submitted online via HMRC's portal.
- Complete the CT600. Enter the R&D credit in the relevant boxes of the CT600. Under the merged scheme, the credit is shown as above-the-line income and then offset against the corporation tax liability. Any excess credit can be surrendered for a payable credit.
- File within the time limit. Claims must be made within two years of the end of the accounting period to which they relate.
Avoiding Common Pitfalls
- Poor documentation is the most common reason claims are challenged. Keep project logs, timesheets, and records of technical discussions as you go — reconstructing them months later is harder and less convincing.
- Overclaiming on routine development work has led to increased HMRC scrutiny. Only claim costs genuinely linked to resolving a scientific or technological uncertainty.
- Connected party rules apply to subcontractor costs — where a subcontractor is a connected company, you can only claim on the lower of actual cost or 65% of the amount paid.
- Grant funding may restrict your claim. If a project has been funded by a notified state aid grant, those costs cannot also be claimed under R&D relief.
- Using a reputable adviser is strongly recommended. HMRC has clamped down on R&D claim farms that took large contingency fees for inflated or fabricated claims. Choose an accountant or tax adviser with a track record in R&D specifically.
Is It Worth Claiming?
For many small businesses — particularly in software, engineering, life sciences, and advanced manufacturing — R&D tax credits represent a meaningful source of funding. Even a company spending £50,000 per year on qualifying R&D could reduce its tax bill by £7,500 or more under the merged scheme. Loss-making R&D-intensive start-ups may receive a cash repayment that helps fund the next phase of development.
The key is to assess eligibility honestly, document the work thoroughly, and file the claim correctly and on time. If you are unsure whether your activities qualify, speak to a chartered tax adviser or accountant who specialises in R&D claims before your accounting period closes.