R&D Tax Relief UK 2025 | SME Scheme Guide
Research and Development (R&D) tax relief allows UK companies to reduce their Corporation Tax bill — or receive a cash payment — on qualifying expenditure on scientific and technological innovation. Use our calculator to estimate your potential saving.
R&D Tax Relief Calculator 2025
What Is R&D Tax Relief?
R&D tax relief is a UK government incentive designed to encourage companies to invest in innovation. Companies that carry out qualifying research and development can claim:
- An enhanced deduction on their Corporation Tax return — meaning they deduct more than the actual cost of R&D from their taxable profits, or
- A payable cash credit if the company is loss-making and cannot use the enhanced deduction.
The scheme has existed since 2000 and has paid out billions of pounds in relief. However, HMRC has significantly tightened its administration from 2023 onwards following high rates of fraudulent and inflated claims. The Additional Information Form (AIF) requirement and mandatory pre-notification are part of these reforms.
Two Schemes: SME vs RDEC
| Feature | SME Scheme | RDEC (Large Companies) |
|---|---|---|
| Who qualifies | Under 500 staff, under €100m turnover OR under €86m balance sheet | Large companies; SMEs contracted by large companies |
| Enhanced deduction rate (2025) | 86% of qualifying costs | N/A — credit-based |
| Credit rate (2025) | 10% payable credit (loss-making); 14.5% if R&D-intensive | 20% above-the-line credit |
| Net benefit (25% taxpayer) | ~21.5p per £1 (profitable); 10p per £1 (loss-making) | ~15p per £1 (at 25% corp tax) |
| Where claimed | CT600 + CT600L + AIF | CT600 + CT600L + AIF |
| R&D-intensive uplift | 14.5% credit if R&D ≥ 40% of total expenditure | Not applicable |
What Qualifies as R&D?
HMRC defines R&D using the Department for Science, Innovation and Technology (DSIT) guidelines. The key tests are:
1. Advance in Science or Technology
The project must seek to advance overall knowledge or capability in a field of science or technology — not just the company's own knowledge. Creating a new product, process, or software system that is novel and not currently known or achievable is a good starting point, but you must also be able to explain what advance you are trying to make.
2. Scientific or Technological Uncertainty
There must be genuine uncertainty that a competent professional in the field could not readily resolve. If the answer is easily available in textbooks, academic journals, or from an expert consultant, it is not qualifying uncertainty. The uncertainty can be about whether something is achievable at all (capability uncertainty) or about the best way to achieve a known goal (process uncertainty).
3. Attempting to Overcome the Uncertainty
The company must have actually tried to resolve the uncertainty through systematic investigation or research. Merely using existing techniques in a new context, or applying known methods to a new industry, usually does not qualify.
What Does NOT Qualify
- Routine testing, quality control, or debugging of existing software
- Market research, focus groups, or customer surveys
- Arts, humanities, or social science projects
- Developing a new app using existing technology without technical innovation
- Adapting existing products for a new market
- Cosmetic changes or minor modifications
Qualifying Costs Under the SME Scheme
| Cost Category | Qualifying % | Notes |
|---|---|---|
| Directly employed staff (salary, NIC, pension) | 100% | Staff directly and actively engaged in R&D |
| Externally provided workers (EPWs) | 65% | Via staffing agency, paid to agency |
| Subcontractors (unconnected) | 65% | From April 2024, must be UK-based unless exceptions apply |
| Consumable materials | 100% | Materials transformed or consumed in the R&D process |
| Software licences | 100% | Where directly used in the R&D |
| Payments to clinical trial volunteers | 100% | For pharmaceutical R&D |
| Data and cloud computing costs | 100% | Added from April 2023 |
| Capital expenditure | 0% | Plant and machinery — claim via Annual Investment Allowance instead |
Worked Example: SME Profitable Company
A UK software SME with 40 staff spends £100,000 on a qualifying AI project in the year to 31 March 2026:
- Staff costs (3 developers, 60% of time on R&D): £80,000
- Cloud computing and data costs: £12,000
- Software licences used in R&D: £8,000
- Total qualifying R&D expenditure: £100,000
Enhanced deduction: £100,000 × 86% = £86,000 additional deduction
Total deduction: £100,000 + £86,000 = £186,000
Corporation tax saving (at 25%): £86,000 × 25% = £21,500
The company spends £100,000 on R&D and saves £21,500 in corporation tax — an effective government subsidy of 21.5p in the £1.
Worked Example: SME Loss-Making Company
A biotech startup makes a trading loss of £50,000 before R&D relief, with £100,000 qualifying R&D spend.
- Enhanced deduction: £100,000 × 86% = £86,000
- Total loss: £50,000 + £86,000 = £136,000
- Surrenderable loss (capped at £100,000 × 186% = £186,000): £136,000
- Payable credit at 10%: £136,000 × 10% = £13,600 cash from HMRC
The startup receives a £13,600 cash credit — a genuine cash injection despite having no tax liability.
R&D-Intensive SMEs (ERIS)
From 1 April 2023, SMEs where qualifying R&D expenditure represents at least 40% of total expenditure qualify as "R&D-intensive" and can claim a higher payable credit rate of 14.5% on surrendered losses (instead of the standard 10%). This is particularly valuable for early-stage biotech, deep tech, and pharmaceutical companies with high R&D cost bases relative to revenue.
RDEC: Research and Development Expenditure Credit
The RDEC applies to large companies (over 500 staff with turnover over €100m or balance sheet over €86m) and also to SMEs that are:
- Contracted to perform R&D by a large company and subcontracting the work
- In receipt of notified state aid for the R&D project
- A subsidised company where another party has a right to claim the IP arising from the R&D
The RDEC rate is 20% of qualifying expenditure. It appears as an "above the line" credit — it reduces costs on the profit and loss account before tax. After corporation tax at 25%, the net benefit is approximately 15p per £1 of qualifying R&D spend.
The Additional Information Form (AIF)
From 8 August 2023, all R&D claims require submission of an Additional Information Form (AIF) via the HMRC online service before the CT600 is filed. The AIF must include:
- Contact details of the main senior internal R&D contact and (if used) any external agent
- A description of each qualifying R&D project — the baseline state of knowledge, the advance sought, and the scientific/technological uncertainties
- A breakdown of qualifying costs by category
The AIF is separate from HMRC's online portal and is filed at https://www.tax.service.gov.uk/guidance/r-and-d-additional-information-form. Failing to file an AIF before the CT600 invalidates the claim.
Pre-Notification Requirement
From 1 April 2023, companies that are:
- Claiming R&D relief for the first time, or
- Have not made a claim in any of the three preceding accounting periods
...must notify HMRC of their intention to claim within six months of the end of the accounting period. This is done via HMRC's online R&D notification service. Missing the deadline forfeits the right to claim for that period — there is no extension or reasonable excuse override.
How to Claim via CT600
- Identify qualifying projects and document the scientific/technological uncertainties, work done, and how uncertainty was overcome.
- Calculate qualifying costs by staff, subcontractors, consumables, software, and cloud costs.
- Submit the AIF online before filing the CT600.
- File CT600 and CT600L — Box 650 (enhanced deduction), Box 655 (R&D credit), and the credit claimed on CT600L.
- HMRC review: HMRC may accept the claim immediately or open a compliance check. Checks can take 6–24 months for complex cases.
Time Limits
R&D claims must be made within two years of the end of the accounting period to which they relate. For a year ending 31 March 2024, the claim must be submitted by 31 March 2026. Amended returns can be submitted within the same two-year window.
HMRC Compliance and Risk
HMRC has significantly increased its R&D compliance activity following a surge in fraudulent and inflated claims. Key risk areas include:
- Overclaiming staff time on R&D (time should be recorded and apportioned carefully)
- Including non-qualifying costs such as routine development, market research, or administration
- Subcontractor costs claimed at 100% rather than 65%
- Overseas R&D costs after the UK-only restriction (effective April 2024 for most cases)
- Claims by companies with little or no technical staff — HMRC is sceptical of large claims from small companies
- Claims prepared by promoters using template technical narratives not tailored to actual projects
HMRC can open enquiries up to four years after filing (twelve years in cases of fraud). Penalties for fraudulent R&D claims can be up to 200% of the overclaimed tax where deliberate and concealed.
Frequently Asked Questions — R&D Tax Relief
What is the R&D tax relief rate for SMEs in 2025/26?
Profitable SMEs can claim an 86% enhanced deduction, giving a net corporation tax saving of approximately 21.5p per £1 of qualifying R&D spend (at the 25% main rate). Loss-making SMEs can surrender losses for a 10% payable credit. R&D-intensive SMEs (R&D is 40%+ of total expenditure) receive 14.5% on surrendered losses.
What qualifies as R&D for tax purposes?
Work qualifies if it seeks an advance in overall scientific or technological knowledge, involves genuine uncertainty that a competent professional could not readily resolve, and involves systematic investigation to overcome that uncertainty. Routine development, software built using existing technology, market research, and social science projects do not qualify.
Can a loss-making company claim R&D tax credits?
Yes. Loss-making SMEs can surrender qualifying losses for a cash credit at 10% (or 14.5% for R&D-intensive companies). This is a genuine cash payment from HMRC, not just a reduction in a future tax bill. Large companies using RDEC can also receive a payable credit when the RDEC exceeds their corporation tax liability.
How do I claim R&D tax relief?
First, submit the Additional Information Form (AIF) online before filing your Company Tax Return (CT600). Then file CT600 and supplementary form CT600L with the relief figures. The AIF must be filed before the CT600 — if not, the claim is invalid. For new claimants, pre-notify HMRC within six months of the accounting period end.
What is the time limit for making an R&D claim?
You have two years from the end of the accounting period in which the R&D costs were incurred to make or amend an R&D claim. Missing this deadline means the relief is permanently lost. There are no extensions for administrative errors or late-discovery of entitlement.
What is the pre-notification requirement?
Companies making their first R&D claim, or returning claimants who have not claimed in the previous three years, must notify HMRC of their intention to claim within six months of the end of the accounting period. This is non-negotiable — missing the window forfeits the claim. Existing regular claimants with a continuous claim history are not affected.
Are subcontractor costs claimable under the SME R&D scheme?
Yes, but only 65% of payments to unconnected subcontractors for qualifying R&D work are included in the cost base. From April 2024, subcontractor costs generally must relate to UK-based R&D activity — overseas costs are excluded unless they meet specific criteria (regulatory, geographic, or environmental conditions unavailable in the UK).
What is RDEC and is it the same as the SME scheme?
RDEC (Research and Development Expenditure Credit) is a separate scheme for large companies and some SMEs in specific circumstances. The rate is 20% of qualifying expenditure, shown as an above-the-line credit. After corporation tax, the net benefit is about 15p per £1 for a 25% taxpayer. Unlike the SME scheme, RDEC improves both the P&L and the tax position.