R&D Tax Credits Guide UK 2026
Research and Development (R&D) Tax Credits remain one of the most valuable government incentives for UK businesses in 2026. Designed to fuel innovation, this relief allows companies to reclaim a significant portion of their development costs. Whether you are a small start-up developing a new app or a large manufacturing firm improving production lines, understanding the nuances of the SME scheme and the Research and Development Expenditure Credit (RDEC) is crucial for maximizing your claim.
R&D Tax Credit Estimator 2026
Estimated Benefit:
Understanding the R&D Tax Relief Landscape in 2026
The UK government's R&D tax relief landscape has evolved significantly over the past few years. As we navigate 2026, the distinctions between the Small and Medium Enterprise (SME) scheme and the RDEC scheme remain pivotal, although convergence discussions continue. The primary goal is to reward companies that are taking risks to resolve scientific or technological uncertainties.
The SME R&D Scheme
The SME scheme is designed specifically for smaller companies (fewer than 500 employees, and either turnover under €100m or balance sheet under €86m). It is generally more generous than the large company scheme.
- Enhanced Deduction: Profitable SMEs can deduct an extra 86% of their qualifying costs from their yearly profit, in addition to the normal 100% deduction. This creates a total 186% enhanced deduction. This reduces the corporation tax liability significantly.
- Payable Credit for Loss-Makers: If your company is making a loss, or the R&D deduction pushes you into a loss, you can surrender that loss for a payable tax credit. The standard rate for this surrender is 14.5% for R&D intensive companies (where qualifying R&D expenditure is at least 30% of total expenditure).
RDEC (Research and Development Expenditure Credit)
The RDEC scheme is primarily for large companies, but SMEs may also need to use it if they have received notified state aid (like a grant) for their project or represent a subcontractor to a large company.
- The Credit Rate: The RDEC rate stands at 20%.
- Above the Line: Unlike the SME deduction, RDEC is an "above the line" credit, meaning it is treated as taxable income. The net benefit is calculated after applying the Corporation Tax rate.
What Qualifies as R&D?
A common misconception is that R&D is restricted to men in white coats working in laboratories. In reality, qualifying activities exist in software development, engineering, food formulation, construction, and manufacturing. To qualify, a project must meet the government's standard definition of R&D:
1. Seeking an Advance
The project must aim to create an advance in the overall field of science or technology, not just for your own business. This means developing something that isn't currently available or deducible by a competent professional in the field.
2. Resolving Uncertainty
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
What Does Not Qualify?
Work in the arts, humanities, and social sciences (including economics) does not qualify. Additionally, routine copying, reverse engineering without trying to improve the underlying technology, and cosmetic changes do not count.
Eligible Costs Breakdown
Identifying the correct costs is vital for a robust claim. In 2026, the eligible cost categories include:
Staff Costs
You can claim a proportion of the salaries, employer's Class 1 National Insurance contributions, and pension fund contributions for staff directly and actively engaged in the R&D project. If an employee spends 40% of their time on R&D, you claim 40% of their staff costs. Administrative and support staff costs generally do not qualify unless they are directly supporting the R&D (e.g., maintenance of R&D equipment).
Subcontractors
Under the SME scheme, you can claim 65% of the payments made to unconnected subcontractors. If the subcontractor is a connected party (e.g., part of the same group), special rules apply, usually allowing you to claim the lower of the payment made or the relevant costs incurred by the subcontractor.
Software, Data, and Cloud Computing
Modern R&D relies heavily on digital infrastructure. Allowable costs include:
- License fees for software used in R&D.
- Data license costs (purchasing datasets for analysis).
- Cloud computing costs (AWS, Azure, etc.) dedicated to computation and data processing for R&D purposes. Note: General server hosting for clients does not qualify.
Consumables and Utilities
Materials that are "consumed or transformed" in the R&D process are eligible. This includes prototypes that are not sold. You can also claim a proportion of heat, light, and power (water, gas, electricity) used by the R&D facility. Rent and telecom costs are explicitly excluded.
The Claim Process Step-by-Step
1. Identification and Assessment
Review all projects undertaken in the financial year. Identify which ones faced technological challenges. Interview technical leads to document the "baseline" of technology at the start and the specific uncertainties addressed.
2. Financial Calculation
Extract relevant costs from your ledger. Apportion staff time based on realistic assessments, not estimates. Ensure subcontractor invoices clearly describe the work done.
3. Technical Narrative
HMRC requires a technical report. This should not be a marketing brochure. It must concisely explain the advance sought, the uncertainties faced, and how they were overcome. It is the most critical document for defending a claim.
4. Additional Information Form (AIF)
Since August 2023, it is mandatory to submit a digital Additional Information Form before filing the Company Tax Return (CT600). Failure to do so results in the automatic rejection of the R&D claim. The AIF requires details of the projects, costs, and the identity of any agent who advised on the claim.
HMRC Enquiries and Compliance
HMRC has significantly increased its compliance activity. The "volume compliance" approach means more claims are being checked. Common triggers for enquiries include:
- Significant fluctuations in claim value without explanation.
- Claims for projects in sectors not typically associated with R&D (e.g., care homes, purely wholesale businesses) without strong justification.
- Use of inconsistent SIC codes.
- Generic technical descriptions that fail to identify the uncertainty.
To mitigate risk, ensure you have contemporaneous records—emails, meeting notes, test logs, and code commits—that prove the R&D took place when you say it did.
Connected Company Rules
When your company is connected to another (via control or major shareholding), you must aggregate the data to determine SME status. Even if your company is small, being part of a large group might force you into the RDEC scheme. Additionally, transactions between connected companies (like subcontracting) happen at cost, without the profit markup being eligible for relief.
Advance Assurance
For small companies claiming for the first time, Advance Assurance is a valuable option. You submit your project details to HMRC before or within the first 6 months of the end of the accounting period. If approved, HMRC guarantees not to enquire into the R&D aspect of your tax returns for the first three accounting periods, provided the facts don't change.
Time Limits
The deadline for submitting an R&D claim is two years from the end of the accounting period in which the money was spent. For example, if your year-end is 31 December 2025, you have until 31 December 2027 to submit the claim or amend the return.
Sector Specifics
Software and IT
Routine bug fixing, UI updates, and using standard libraries do not qualify. However, developing new algorithms, novel data architecture, or resolving systemic latency issues that standard techniques couldn't fix are classic R&D examples.
Manufacturing
Process improvement is a key area. If you are trying to increase throughput, reduce waste, or handle new materials, and standard machine settings or known engineering principles fail to achieve the result, the experimentation phase is likely R&D.
Construction
Developing unique solutions for difficult ground conditions, listed buildings where standard structural interventions are forbidden, or novel modular construction techniques can qualify. Standard site challenges usually do not.
Comparison Table: SME vs RDEC (2026)
| Feature | SME Scheme | RDEC Scheme |
|---|---|---|
| Company Size | <500 staff, <€100m turnover | Large companies (or SMEs with subsidies) |
| Benefit Type | Enhanced Deduction / Payable Credit | Taxable Income Credit |
| Relief Rate | 186% deduction / 10% or 14.5% credit | 20% Gross Credit |
| Subcontractors | Allowed (65% restriction) | Generally restricted (except specific entities) |
| Can you claim if you have a grant? | Generally No (for funded project) | Yes |
Frequently Asked Questions
Can I claim R&D tax credits if my project failed?
Yes. In fact, a failed project is often the strongest evidence of R&D. It proves that technological uncertainty existed and was significant enough to prevent success. You can claim for all the eligible costs incurred up until the point the project was abandoned.
How far back can I claim R&D tax credits?
You can claim for the two previous accounting periods. For most companies, this means you can look back two years from the current date to see if you have missed any eligible expenditure. Once the two-year anniversary of the accounting period end has passed, the opportunity to claim for that year is lost forever.
What is the "Competent Professional" test?
To prove uncertainty, you must show that a competent professional in the field (someone with relevant qualifications and experience) could not easily deduce the solution. If an expert in the field would view your problem as a routine matter of configuration or standard practice, it is not R&D.
Do dividends count as R&D costs?
No. Dividends are a distribution of profit, not an expense incurred in the course of R&D. Only salaries paid via PAYE, employer NI, and employer pension contributions are eligible staff costs. This is a crucial consideration for owner-managed businesses when deciding on remuneration strategies.
Does receiving a grant affect my R&D claim?
Yes, significantly. Subsidized expenditure generally cannot be claimed under the SME scheme. If you receive a Notified State Aid grant for a project, the entire project expenditure (not just the grant amount) usually has to be claimed under the less generous RDEC scheme. However, "De Minimis" aid might only affect the specific funded portion.
What is the difference between the 10% and 14.5% credit rate?
Since April 2023, the standard credit rate for loss-making SMEs was reduced to 10%. However, "R&D Intensive" SMEs—those where qualifying R&D expenditure makes up at least 30% of total expenditure—can still claim the higher 14.5% rate. This protects start-ups and research-heavy firms.
How long does it take to receive the money?
HMRC aims to process claims within 28 days, but mostly 40 days. However, due to increased compliance checks, processing times can vary. If an enquiry is opened, the payout will be delayed until the enquiry is resolved. Ensuring your AIF is accurate and comprehensive is the best way to ensure a speedy payout.