R&D tax relief: What businesses need to know

Research and development (R&D) can feel like a luxury when margins are tight. R&D tax relief is designed to soften that cost by giving companies tax support when they try to develop new or improved products, processes or services.

The rules have changed significantly over the past couple of years. From 1 April 2024, we now have a merged R&D expenditure credit (RDEC) scheme and a separate route for loss-making, R&D-intensive small and medium-sized enterprises (SMEs). At the same time, HMRC has tightened compliance and introduced more paperwork, which means the quality of your claim matters more than ever.

Despite the tougher environment, innovation remains a big part of the UK economy. Official Office for National Statistics (ONS) figures show that UK businesses spent £50bn on R&D in 2023, an increase of 2.9% on the previous year (ONS, 2023). At the same time, HMRC’s latest statistics show around 46,950 R&D tax credit claims in 2023/24, down 26% on the previous year, with total support of £7.6bn (HMRC, 2025).

In this article, we explain how R&D tax relief works for 2025/26, who can claim, the main risks to watch and the practical steps to put a robust claim together.

How R&D tax relief works from 2025/26

For accounting periods beginning on or after 1 April 2024, there are now two main types of R&D tax relief.

• The merged RDEC-style scheme: Applies to most companies, regardless of size.
• Enhanced R&D intensive support (ERIS): A more generous version for loss-making SMEs where R&D is a substantial share of total costs.

Under the merged scheme, qualifying R&D spend generates a taxable expenditure credit at a rate of 20% of eligible costs. The credit is treated as trading income and then taxed under corporation tax. For many companies paying the main 25% corporation tax rate, this gives an effective net benefit of roughly 15% of qualifying R&D spend, depending on their exact position (HMRC, 2025).

ERIS is available only to loss-making SMEs that meet the “intensity” test. The company must:

• be an SME for R&D purposes
• be loss-making for tax
• have qualifying R&D expenditure that is at least 30% of total expenditure for the period, with some grace period rules if that percentage drops temporarily.

If you qualify for ERIS, you can take an enhanced deduction of 186% of qualifying costs and access a payable tax credit at 14.5% of the surrenderable loss. This can provide a valuable cash injection, but the conditions are strict and the calculations need care.

Both routes use the same qualifying expenditure rules, which makes it easier to compare options – but you can only claim under one scheme for the same spend.

Who can claim R&D tax relief and what actually counts

R&D tax relief is available only to companies within the scope of UK corporation tax. That means limited companies. Sole traders and traditional partnerships cannot claim directly; however, they may structure R&D activities through a company.

To qualify, your project needs to seek an advance in science or technology and attempt to overcome scientific or technological uncertainty. It is not enough that the project is new to your business – HMRC expects you to show that a competent professional in your field could not easily work out the solution at the start. HMRC’s guidance on the merged scheme and ERIS sets out how this definition is applied in practice.

In simple terms, a strong R&D tax relief claim usually has the following.

• Eligible companies: A UK company within corporation tax carrying out or funding R&D activity.
• Clear projects: Defined pieces of work, not just general “innovation” spread across the business.
• Technical uncertainty: Real problems or constraints that need systematic research, trial or testing to resolve.

Typical qualifying costs include the following.

• Staff costs: Gross pay, employer national insurance contributions (NIC) and pension for employees directly involved in R&D.
• Externally provided workers: Certain agency or group staff working on R&D, subject to specific rules.
• Software and cloud: Software licences and cloud computing costs used directly in R&D activities.
• Consumables: Materials, components and utilities that are used up in the R&D process.

Common exclusions include the following.

• Routine work: Regular product updates or bug fixes that do not involve real technical uncertainty.
• Commercial activity: Market research, branding, sales and distribution.
• Pure aesthetics: Design changes based only on look and feel, with no underlying technical challenge.

Many sectors can qualify – manufacturing, engineering, software, life sciences, construction and more – but each claim needs to be built around the specific technical challenges your teams faced.

Key developments affecting R&D tax relief claims

HMRC’s latest statistics show that the number of R&D tax credit claims has fallen sharply, even though qualifying R&D expenditure remains high. For 2023/24, HMRC estimates total qualifying R&D expenditure of £46.1bn, down only 1% on the previous year, while the number of claims fell by 26% to 46,950 and total support was £7.6bn.

For SMEs and owner-managed businesses, three developments matter in 2025/26.

• Stronger compliance focus: HMRC has invested heavily in compliance resources and is using data from previous claims to identify higher-risk cases. More inquiries and detailed questions are now routine rather than rare.
• Additional information form: All R&D tax relief claims now need a standardised “additional information form” before you file the corporation tax return. This includes a breakdown of qualifying costs by category and narrative descriptions of your projects and uncertainties.
• New structure of reliefs: For periods starting on or after 1 April 2024, the SME and RDEC schemes are replaced by the merged expenditure credit plus ERIS. This is intended to simplify the system, but it does change who gains most and how benefits are calculated.

These changes mean R&D tax relief is still valuable, but you now need to treat it as a technical exercise backed by evidence, not a last-minute add-on to the tax return. Bringing your accountant and technical staff together early usually results in a stronger, more defensible claim.

Practical steps to claim R&D tax relief in 2025/26

If you think your company might qualify, a bit of structure goes a long way. Here is what a sensible R&D tax relief process for SMEs looks like.

• Identify candidate projects: Start with projects where your team genuinely did not know at the outset whether the solution would work. Ask your engineers or developers which pieces of work were most technically demanding.
• Test against the R&D definition: For each project, ask whether you were seeking a scientific or technological advance and dealing with uncertainty, rather than commercial or cosmetic change. If you are unsure, we can help benchmark your work against HMRC’s expectations.
• Map qualifying costs: Tag staff time, subcontractor costs, software and consumables to each project. Avoid bundling in overheads that have little direct link to the R&D itself.
• Document the work as you go: Keep records of experiments, prototypes, test results, technical meeting notes and project boards. This evidence helps you explain your R&D clearly if HMRC asks questions later.
• Prepare the additional information form properly: Treat the technical narrative as seriously as the numbers. Explain the baseline knowledge, the uncertainty, what you tried, what failed and what you learned.
• Watch the time limits: You normally have up to two years after the end of your accounting period to make or amend an R&D claim. Leaving it until the last minute increases the risk of missing information or errors.

If you are thinking about your first claim, or you have not claimed for a few years, you may also need to notify HMRC that you plan to make an R&D tax relief claim within a set period after your year end. This is another reason to get advice early rather than waiting until the corporation tax return is due.

We regularly support owner-managed businesses through this process as part of wider tax and accounts work. Find out more about our services.

Common risks and red flags with R&D tax relief

Because HMRC is paying much closer attention to R&D tax relief, avoiding common pitfalls is just as important as identifying qualifying projects. Points we watch for with clients include the following.

• Assuming all tech work qualifies: Paying a software developer or engineer does not automatically make their work R&D. You still need to show there was a scientific or technological challenge.
• Weak or generic narratives: Vague claims that simply describe a project plan without explaining the technical problem and why it was hard are more likely to be challenged.
• Over-reliance on third-party “R&D boutiques”: Some advisers still push aggressive claims or charge high contingent fees. HMRC’s clampdown means businesses bear the risk if a claim is later found to be incorrect.
• Poor record-keeping: If you cannot show how you arrived at your figures, HMRC may restrict the claim and consider penalties if they think you have been careless.
• Ignoring HMRC correspondence: If you receive a query about an R&D tax relief claim, respond promptly and fully. Silence or partial answers rarely make the situation better.

HMRC’s own statistics highlight the need for care. The decline in claim numbers, alongside relatively stable qualifying expenditure, suggests that some businesses have stepped back from claiming due to the additional compliance burden and concerns about errors. A well-prepared claim, based on realistic projects and solid evidence, is more likely to stand up to scrutiny and provide a reliable benefit.

Making R&D tax relief work for your business

R&D tax relief remains an important support for innovative UK companies, even with the recent reforms. The merged expenditure credit and ERIS give a clearer framework, but they also place more responsibility on you to justify why your work meets HMRC’s definition of R&D and to back that up with data.

If you are investing time and money in solving technical problems, it is worth testing whether those projects qualify. The starting point is simple – identify the projects that genuinely involved trial and error, understand which costs relate directly to that work, and make sure you can explain the story in plain English.

We help owner-managers look at R&D tax relief alongside their wider tax position, cashflow and growth plans. That might mean deciding whether to claim under ERIS or the merged scheme, planning project budgets with the relief in mind, or reviewing earlier claims to ensure they still reflect HMRC’s latest guidance and statistics.

If you would like practical support reviewing your projects or preparing an R&D tax relief claim for 2025/26, get in touch with us.