R&D tax credits: A guide for UK small businesses

Published Sunday 5 October 2025

Table of contents

• Understanding R&D tax credits
• Who qualifies for R&D tax credits
• What projects qualify for R&D tax credits
• How R&D tax credits work
• Benefits of claiming R&D tax credits
• How to claim R&D tax credits
• Changes to R&D tax credits in 2023
• Making R&D tax credits work for your business
• FAQs on R&D tax credits

Key takeaways

• Determine your company size using the SME criteria (fewer than 500 employees, turnover less than €100 million, balance sheet less than €86 million) to identify which R&D tax relief scheme applies to your business and calculate the correct relief rates.

• Submit mandatory pre-claim notifications to HMRC for accounting periods starting on or after 1 April 2023, and complete the Additional Information Form from 8 August 2023, as claims without these requirements will be automatically rejected.

• Track qualifying R&D costs systematically including staff salaries, consumable materials, software licenses, subcontractor fees, and clinical trial expenses to maximise your claim value and ensure accurate documentation.

• Apply for R&D tax credits even for failed projects, as long as your work aimed to resolve scientific or technological uncertainty and advance knowledge in your field, since project success is not required for eligibility.

Understanding R&D tax credits

Research and development (R&D) tax credits are government incentives that reduce your corporation tax bill or provide cash refunds for qualifying innovation work. If you're working on a scientific or technological innovation in the UK, these credits could help you fund your project, reduce innovation costs, hire new staff and grow your business.

To be eligible, your project must meet these requirements:

• Project type: scientific or technological innovation
• Excluded areas: arts, humanities, social sciences (including economics)
• Business relevance: related to your existing trade or a new trade you plan to establish

Qualifying projects must demonstrate 3 key elements:

• Advance in the field: Your work seeks to create new knowledge or improve existing processes
• Scientific uncertainty: You're solving problems that can't be easily resolved using current knowledge
• Professional challenge: The solution isn't obvious to experts already working in your field

Who qualifies for R&D tax credits

Two types of research and development (R&D) are available based on company size:

SME scheme – for companies with, according to official guidance, fewer than 500 staff and that fall below certain financial thresholds:

• Fewer than 500 employees
• Turnover less than €100 million
• Balance sheet less than €86 million

RDEC scheme – for larger companies that don't meet SME criteria

When determining your size, include figures from any partner or linked organisations working on the project.

If you don't meet those requirements, you're considered a large company and can claim research and development expenditure credit (RDEC). You can also claim RDEC if your small or medium-sized business is subcontracted to work on a research and development project by a large organisation and you are not eligible for the small and medium-sized enterprise relief.

Linked and partner enterprises

When working out if you're an SME, include staff numbers and turnover or balance sheet totals from any linked or partner enterprises. A partner enterprise exists if another company holds 25% or more of your business's voting rights or capital. This helps you calculate your business size for eligibility.

What projects qualify for R&D tax credits

Your project qualifies if it aims to make a clear advance in science or technology.

Projects that don't qualify

Not all innovation is eligible. You cannot claim research and development tax credits for projects in the arts, humanities, or social sciences. Routine improvements, cosmetic changes, or adopting existing technologies without modification do not qualify.

Scientific and technological uncertainty

Your project must address a scientific or technological uncertainty. If you are solving a problem that a professional in the field cannot easily resolve, and the outcome is uncertain, your project is more likely to qualify.

How R&D tax credits work

R&D tax relief lets you claim extra deductions on qualifying costs:

• Normal deduction: 100% of costs
• Additional relief:Deduct an extra 86% of your qualifying costs from your trading profit for tax purposes
• Total deduction: 186% of your qualifying R&D spend

If your company makes a loss, you can claim a payable credit worth up to 10% of the surrenderable loss. This can rise to 14.5% if your company meets the intensity condition for expenditure.

For accounting periods starting on or after 1 April 2023, you must tell HMRC in advance if you plan to claim. From 8 August 2023, you must also submit an additional information form before filing your claim.

Benefits of claiming R&D tax credits

Claiming research and development tax credits helps you reduce your corporation tax bill or get a cash refund. These credits help your money go further, support your project, and help your company grow.

How to claim R&D tax credits

When claiming research and development tax credits, first check if you qualify as a small or medium-sized enterprise or a large company.

Once you've determined this, you can follow these steps to claim your R&D credits.

1. Identify your qualifying R&D activities

In step one, identify which project activities and costs qualify for research and development relief.

Qualifying costs from project start to finish include:

• Staff costs:Salaries and benefits for R&D team members
• Consumable items: Materials used directly in R&D work
• Software: Licenses and cloud computing for R&D purposes
• External workers: Subcontractor and agency staff costs
• Clinical trials: Volunteer payments and trial costs
• Data licensing: Datasets and computing resources

Check the HMRC website for the complete list of qualifying expenditure.

2. Calculate your R&D spend

The tax credits are calculated based on what you've spent on R&D. To make an R&D credit calculation, first figure out your enhanced expenditure by:

• Working out the costs that are directly attributable to R&D (see above: Identify your qualifying R&D activities)
• Reducing any relevant subcontractor or external staff provider payments to 65% of the original cost
• Adding all the costs together
• Multiplying the figure by 86%
• Adding this to the original R&D expenditure figure

3. Submit your R&D claim to HMRC

Before claiming your R&D tax relief, you must:

• Check if you need to submit a claim notification form to tell HMRC in advance of your claim (for accounting periods beginning on or after 1 April 2023)
• Submit an additional information form to support your claim (from 8 August 2023)

If you don't complete these steps your claim may be ineligible.

Once you've completed these steps, you can submit your R&D claim to HMRC through your company tax return.

If your tax relief claim covers more than 12 months, submit a separate claim for each accounting period. You can claim tax relief up to two years after the end of each accounting period.

Changes to R&D tax credits in 2023

R&D tax credits changed in 2023. Stay up to date with the latest tax regulations to make sure your claim is accepted.

Changing rates of R&D tax relief

Rate changes in April 2023 reduced small and medium-sized enterprise (SME) benefits while increasing large company rates:

SME companies (before vs after):

• Profitable SMEs: 130% relief reduced to 86%
• Loss-making SMEs: 14.5% cash credit reduced to 10%

Large companies: RDEC rates increased (more beneficial than before)

New rules for qualifying software expenditure

The UK government now allows you to claim for the costs of datasets and cloud computing. This is especially helpful if you work with artificial intelligence or machine learning.

You can now include the cost of creating, running and maintaining machine learning, acquiring datasets, and pure mathematics. From 1 April 2023, you can treat mathematical advances as science for research and development purposes, which is often part of software development.

Find out more about staying on top of your digital record keeping in the guide.

New claim requirements

New mandatory requirement from 8 August 2023: As confirmed by the Institute of Chartered Accountants in England and Wales (ICAEW), all companies must complete an Additional Information Form (AIF) before claiming research and development tax relief.

The AIF includes:

• Detailed financial information about your R&D spend
• Technical descriptions of your development work

HMRC will automatically reject claims without a completed Additional Information Form.

Making R&D tax credits work for your business

Research and development tax credits can help fund your innovation, but you need good records to make a successful claim. Track your qualifying costs accurately to make the process smoother and maximise your return.

Use accounting software to keep your research and development expenses organised and ready for your claim. With clear financial records, you and your accountant can apply for the relief you are entitled to and turn your innovation into a financial asset for your business.

Try Xero for free.

FAQs on research and development tax credits

Below are answers to common questions about research and development tax credits.

What qualifies as R&D for tax credit purposes?

You can claim research and development tax credits for developing or improving products, processes or software if you aim to resolve a scientific or technological uncertainty.

Is the R&D tax credit worth claiming for small businesses?

Yes, research and development tax credits can be valuable for small businesses. You can use the credit as a cash injection or tax reduction to fund innovation, hire staff or support growth.

Can I claim R&D tax credits for failed projects?

Yes. You can claim research and development tax credits for failed projects if you tried to overcome a scientific or technological uncertainty.

How long does it take to receive R&D tax credit payments?

HMRC usually processes most claims within a few weeks. Make sure your claim is accurate and well-documented to avoid delays.