R&D Tax Credits: A Guide for UK Businesses and International Groups

Research and Development (R&D) tax credits are one of the UK government's most valuable business incentives, designed to encourage private sector investment in innovation. For qualifying companies, they can reduce corporation tax bills significantly or, where a company is loss-making, generate a direct cash repayment from HMRC. Despite their value, the regime has become more complex, more scrutinised, and subject to more frequent change than any other area of UK business taxation in recent years. Understanding the current rules is essential before making a claim.

The Two-Scheme Structure (As at 2024 Onwards)

Historically, R&D tax relief operated via two separate schemes: the SME scheme (for companies with fewer than 500 employees and meeting financial thresholds) and the Research and Development Expenditure Credit (RDEC) for larger companies. From 1 April 2024, HMRC introduced a merged scheme that broadly combines both into a single credit-based approach for most companies. However, the R&D intensive SME scheme remains a separate, enhanced track. This guide describes the post-2024 landscape.

The Merged Scheme (From April 2024)

Under the merged scheme, all qualifying companies — regardless of size — claim an RDEC-style credit of 20% of qualifying R&D expenditure. This credit is:

• Treated as taxable income (grossed into profits), but with a corresponding deduction, producing a net effective benefit of approximately 15% of qualifying expenditure after corporation tax at 25%.
• Payable: where the credit exceeds the tax liability, the difference is repaid by HMRC in cash (subject to a PAYE/NIC cap — see below).

The merged scheme simplifies the landscape for companies that operate across the SME/large company boundary, and standardises treatment for subcontracted R&D and externally provided workers.

The R&D Intensive SME Scheme

SMEs that meet the definition of "R&D intensive" retain access to an enhanced rate. An SME is R&D intensive if qualifying R&D expenditure exceeds 30% of its total expenditure in the period (reduced from 40% in 2024–25 onwards). For qualifying R&D intensive SMEs, the enhanced credit rate is 27%, producing a net effective rate of approximately 18.5% after corporation tax.

The R&D intensive SME track is particularly valuable for early-stage technology and life sciences companies that are pre-revenue or loss-making, for whom the payable credit represents real cash to fund operations.

The PAYE/NIC Cap

For payable credits (cash repayments from HMRC), there is a cap equal to £20,000 plus three times the company's total PAYE and NIC liability for the period. This cap prevents abusive structures where companies with no genuine UK workforce claim large cash repayments. Most businesses with genuine R&D employees will not be affected by the cap.

Mandatory Advance Notification

From April 2023, companies claiming R&D tax relief for the first time (or after a gap of three or more years) must submit an advance notification to HMRC at least six months before the end of the accounting period in which the R&D expenditure is incurred. The notification is submitted online and requires basic information about the nature of the R&D activities and the expected claim.

Failure to submit the advance notification means the claim is invalid and cannot be made retrospectively. This is a hard rule with no discretion for late submission (save in exceptional circumstances). Companies planning their first R&D claim must identify this requirement early in the accounting period.

Companies that have claimed continuously and without a gap do not need to re-notify — the ongoing notification applies only to first-time and recommencing claimants.

What Qualifies as R&D?

HMRC defines qualifying R&D by reference to the BEIS guidelines, which follow the internationally recognised Frascati Manual. Key principles:

The project must seek to achieve an advance in science or technology: not merely in the company's own knowledge, but objectively — the advance must be in the overall field of knowledge. Applying existing techniques to a new commercial context does not qualify.

The advance must involve the resolution of scientific or technological uncertainty: the outcome of the project must not be readily deducible by a competent professional in the field at the outset.

Routine or superficial work does not qualify: debugging standard software, aesthetic design work, compliance testing, and social science or arts research are all excluded.

Qualifying Expenditure Categories

Staffing costs: employment costs (salary, NIC, employer pension contributions) of employees who are directly engaged in R&D activities. Where an employee spends only part of their time on R&D, only the R&D proportion qualifies.

Consumables and materials: materials consumed or transformed in the R&D process. Prototype materials may qualify; materials that become part of a product sold to customers require careful analysis.

Software: costs of software licences used directly in the R&D process. General IT infrastructure costs do not qualify.

Subcontracted R&D: under the merged scheme, the company can claim 65% of payments to third-party subcontractors for R&D activities (previously only the SME scheme allowed subcontractor costs; the merged scheme standardises this). The subcontractor must themselves be performing R&D activities — paying a supplier for a finished product does not qualify.

Externally provided workers (EPWs): costs of agency workers or seconded staff performing R&D, at 65% of the cost (reflecting an assumption that the EPW supplier's margin is excluded).

Clinical trial volunteers: qualifying payments to participants in clinical trials.

Rising HMRC Enquiry Rates

HMRC's approach to R&D claims has tightened considerably since 2021. The proportion of claims subject to formal enquiry has increased significantly, driven by:

• A rise in claims submitted by specialist R&D advisory firms operating on a no-win, no-fee basis, some of which have taken aggressive positions on qualifying activities.
• Fraudulent claims submitted for entirely fictitious R&D activities.
• Genuine misunderstandings of the qualifying criteria, particularly in software and digital businesses.

Key areas of HMRC challenge:

• Claims that include work which is not scientifically or technologically uncertain (e.g., routine software development using established frameworks).
• Claims that include management time, commercial development, or market research as "R&D time."
• Claims based on inflated staffing percentages without supporting timesheets.
• Claims for software tools that are general business IT rather than tools used directly in R&D.

Businesses should maintain contemporaneous documentation of their R&D projects: project logs, technical assessments of uncertainty, records of failed approaches, and evidence of how staff time was allocated. Claims prepared based on interviews conducted years after the expenditure are far more vulnerable on enquiry.

Additional Information Requirement

From April 2023, all R&D claims must be accompanied by an Additional Information Form (AIF), submitted separately via HMRC's online portal. The AIF requires:

• Details of the R&D projects (a brief technical description of the qualifying work).
• The name and contact details of the person who prepared the claim.
• Breakdown of qualifying expenditure by category.

Without the AIF, the R&D claim in the corporation tax return is treated as incomplete. HMRC has power to remove the claim if the AIF is not submitted.

International R&D Considerations

Overseas Expenditure

Under the merged scheme (from April 2024), qualifying expenditure on subcontractors or EPWs working outside the UK is generally excluded. There are limited exceptions for activities that cannot reasonably be performed in the UK (e.g., clinical trials requiring specific geographic patient populations, geological surveys requiring work in a specific location). Companies with significant overseas R&D activity should reassess their claims under the post-2024 rules.

International Groups

For international corporate groups, R&D tax credits raise questions about transfer pricing and cost-sharing arrangements. A UK subsidiary that performs R&D and is reimbursed at cost by its overseas parent may not be entitled to the full credit on those costs — HMRC requires the claimant to bear the R&D expenditure at risk. Groups should review their intra-group R&D agreements to ensure the UK entity is economically bearing the R&D risk.

Patent Box Interaction

R&D tax credits and the UK Patent Box regime can both apply to the same activities, but they operate independently. The Patent Box reduces the corporation tax rate on qualifying IP income to 10%. R&D credits reduce the tax base (or generate cash repayments). Both can be used simultaneously; the Patent Box calculation requires careful coordination with the R&D credit to avoid double-counting.

Compliance Caveat

The R&D tax credit regime has changed significantly in 2023 and 2024 and continues to evolve. Credit rates, the definition of R&D intensive SMEs, the overseas expenditure exclusion, and HMRC's interpretation of qualifying activities are all subject to ongoing development. This guide reflects the position as at June 2026. Companies should work with specialist R&D tax advisers who maintain current knowledge of HMRC's technical guidance and enquiry trends. Penalties for incorrect claims — including inaccurate allocation of staff time — can be significant, particularly where HMRC determines a claim was made carelessly.

How Global Investments Can Help

Global Investments advises business-owning clients and their companies on the full landscape of tax-efficient business investment, including the interaction of R&D credits with capital allowances, Patent Box, and broader corporate tax planning. For internationally mobile business owners, we also advise on how R&D credits interact with personal tax positions and group structures. We introduce clients to specialist R&D tax advisory firms where a detailed claim requires technical assessment. Contact us to discuss your business's innovation activity.