R&D tax credits are essentially the government’s way of saying “thanks for innovating” with actual financial support. When your business spends money trying to solve technical problems or develop new products, services, or processes, HMRC will give you cash back or reduce your tax bill as a reward.
It works by allowing you to claim relief on costs such as staff wages, materials, software, and equipment used in R&D projects. Until recently, there were two separate schemes running side by side.
Small and medium-sized companies received a more generous deal through the SME scheme, while larger businesses used something called RDEC (Research & Development Expenditure Credit), which was essentially a less generous version.
However, as of April 2024, the two schemes were merged into one, making the scheme more accessible, generally speaking.Â
Read on to learn all about R&D tax credits. Trust us, more businesses can take advantage than you think!
How the New Single R&D Scheme Works
The new system gives everyone the same basic deal: a 20% credit on your qualifying R&D spending. But here’s where it gets interesting – this credit counts as income, so you’ll pay tax on it.
Let’s say you spend ÂŁ10,000 on qualifying R&D work. You’ll get a ÂŁ2,000 credit, but if you’re paying 25% corporation tax, you’ll owe ÂŁ500 tax on that credit. So your actual benefit is ÂŁ1,500, or 15% of what you spent.
This is quite different from the old system, where small companies could deduct their R&D costs before calculating their tax bill, often getting much better effective rates. The new approach places the credit “above the line” in your accounts, which means it appears more clearly in your financial statements – useful for investors, but potentially less valuable in your pocket.
What You’ll Get Back
The amount of money you receive depends on whether your company makes a profit and how much corporation tax you normally pay. Here’s the reality check:
- Profitable companies paying the full 25% rate: You’ll get 15% back on your R&D spending. So ÂŁ10,000 of qualifying costs nets you ÂŁ1,500.
- Smaller profitable companies paying 19% tax: You’ll do slightly better at 16.2% back. That same ÂŁ10,000 gets you ÂŁ1,620.
- Loss-making companies: You get the best deal at 16.2% because the government applies a lower tax rate when working out your position.
For many small businesses, these rates are worse than what they could get under the old system. The government was aware that this would happen, so it created a separate, more generous scheme for companies that conduct extensive research and development (R&D).
The Lifeline for R&D-Heavy Businesses
If your company is loss-making and spends a vast amount on R&D, you may qualify for a program called Enhanced R&D Intensive Support (ERIS). This can give you up to 26.97% back – nearly double what you’d get under the main scheme.
The magic number is 30%. If your R&D spending makes up at least 30% of your total company expenditure, and you’re making a loss, you can use this more generous scheme instead. The government lowered this threshold from an originally planned 40%, which means more companies can benefit.
There’s also a safety net. If you qualified for the intensive scheme last year but your R&D percentage drops below 30% this year, you can still use the generous rates for one more year. This prevents companies from entering and exiting the scheme due to normal business fluctuations.
Who Gets What Under the New Rules?
Here’s a table breakdown of R&D tax credits under the new scheme and what you’ll get:
| Company Type | Profit/Loss Status | R&D Intensity | Scheme Available | What You Get Back |
| Any size company | Profitable (25% tax rate) | Any level | Merged Scheme | 15% |
| Any size company | Profitable (19% tax rate) | Any level | Merged Scheme | 16.2% |
| Any size company | Loss-making | Under 30% | Merged Scheme | 16.2% |
| SME only | Loss-making | 30%+ of total spending | ERIS | Up to 26.97% |
| SME only | Loss-making | Previously qualified, now under 30% | ERIS (grace period) | Up to 26.97% |
Understanding What Qualifies as R&D – Check Your Activities!
If the challenge you’re solving couldn’t easily be overcome by a competent professional using established methods – and you had to experiment, iterate, or invent – then you may be eligible for R&D tax credits.
This table outlines examples by industry to help clarify what kinds of activities may qualify. See if your business and activities slot in:
| Industry | What Might Qualify | What Probably Doesn’t | Why This Matters / Common Misconception |
|---|---|---|---|
| Software & Technology | Developing new algorithms, building machine learning models, or solving performance and scalability challenges may qualify. These often involve technical experimentation and risk. | Standard development work, like creating websites, basic app features, or integrating existing APIs, is unlikely to qualify if the methods are routine and well-documented. | There’s a widespread belief that “all software is R&D” – but unless there’s technical uncertainty, HMRC won’t accept the claim. |
| Manufacturing & Engineering | Activities like prototyping new parts, developing custom machinery, or finding new ways to meet weight or heat constraints often qualify, especially when the outcome isn’t guaranteed at the outset. | Routine upgrades, using standard production methods, or scaling up existing designs typically do not qualify. These are considered operational improvements. | The key error here is confusing internal innovation with industry-level advancement – HMRC only rewards the latter. |
| Life Sciences & MedTech | Developing drug formulations, conducting lab-based product trials, or engineering medical devices with untested mechanisms is usually R&D, as it involves genuine scientific discovery. | Regulatory paperwork, compliance testing, and routine variations on known products generally fall outside the scope. | Just being in a science-heavy sector doesn’t mean all work qualifies – the focus is on the problem-solving process, not the output alone. |
| Construction & Architecture | Innovative use of materials, structural engineering for difficult sites, or development of modular, low-carbon systems may qualify – especially when testing and iteration are involved. | Building to standard specifications, aesthetic design work, or following pre-approved methods doesn’t usually count, even if the build is technically challenging. | A high level of complexity isn’t enough – HMRC wants to see scientific or technological uncertainty, not just logistical or design difficulty. |
| AgriTech & Food Production | Projects involving automated growing systems, allergen-free product reformulation with identical properties, or processing innovations often qualify due to the scientific challenges involved. | Adding new flavours, launching new brands, or using off-the-shelf machinery in standard ways is typically ineligible. | Many food companies confuse novelty with R&D – but unless the work advances food science or process engineering, it won’t qualify. |
| Fintech & Financial Services | Developing fraud detection systems, building secure transaction platforms, or solving real-time data challenges may qualify if they push technical boundaries. | Creating customer dashboards, building standard apps, or automating internal workflows using established tools is unlikely to qualify. | Not all digital projects are technical innovation – R&D must involve new solutions to unresolved technical problems. |
| Retail & E-Commerce | R&D may exist if you’re building proprietary logistics software, recommendation engines, or backend infrastructure that solves novel problems at scale. | Launching a new product line, redesigning a store, or building a website using common platforms doesn’t qualify. | Businesses often mistake commercial innovation for technical – HMRC only supports work that solves previously unsolved technical issues. |
| Creative Agencies & Consultants | Agencies may qualify if they develop unique technical systems (e.g. data platforms or automation engines) that involve real programming or hardware R&D. | Branding, strategy, creative direction, and most visual or content-led client work does not count – no matter how complex or valuable it is. | Creativity isn’t the same as technical uncertainty. R&D relief isn’t available unless you’re developing new technical knowledge or capabilities. |
| Universities & Research Contractors | If the organisation commissions and owns the technical risk – such as developing internal IP for licensing – that may qualify under the rules. | If performing research services for a client under contract, it’s typically the client that gets the relief – not the subcontractor doing the hands-on work. | There’s a common misunderstanding that doing R&D means you qualify – but under the new scheme, the relief goes to the company funding and directing the R&D. |
| Game Development | Developing a game engine, AI behaviours, or new rendering systems may qualify where these involve solving technical challenges with uncertain solutions. | Story writing, art creation, character design, and narrative development don’t qualify – they’re creative, not technical, work. | Game studios often assume the whole project is R&D – but only the systems-level, technical innovation counts under HMRC’s definition. |
When Someone Else Does Your R&D Work
One of the trickiest parts of the new rules involves subcontracted R&D work. The government wants to ensure that the company making the decision to conduct R&D receives the tax relief, not necessarily the company actually performing the work.
The new rules flip the old system on its head. Now, if you hire another company to do R&D work for you, you can usually claim the relief as long as three conditions are met. There needs to be a proper contract, the work needs to qualify as R&D, and you must have “contemplated or intended” that R&D would be necessary.
That last point might sound vague, but it’s actually quite powerful. It means that if you knew going into a project that technical challenges would need to be solved, you can claim relief even if you’re not the one physically doing the problem-solving.
The requirements are:
- Contract requirement: There must be a formal contract between you and the company doing the work
- Qualifying activity: The work being done must meet the standard definition of R&D (solving technical uncertainties)
- Your intent: You must have expected that R&D would be needed when you commissioned the work
This is great news for businesses that commission specialist R&D work from universities, consultants, or other companies.
Overseas R&D: What’s Still Allowed
The new scheme has tightened up significantly on overseas R&D costs. Most payments to foreign subcontractors or workers based abroad are no longer eligible for relief. This is a big change that affects companies with international operations or those that need specialised expertise from overseas.
However, you can still claim overseas costs in specific circumstances. The key test is whether the conditions you need for your R&D simply aren’t available in the UK, and it would be unreasonable to recreate them here.
This might include:
- Physical conditions: Unique testing environments like specific climates, geological conditions, or facilities that can’t be replicated domestically
- Market access: Research that requires access to particular demographics, economic conditions, or consumer behaviours
- Regulatory frameworks: Work that must be done under specific local laws or approval processes
- Specialised resources: Access to unique materials, equipment, or expertise that genuinely isn’t available in the UK
The bar is set quite high; you need to demonstrate that doing the work in the UK isn’t just more expensive or less convenient, but actually unreasonable or impossible.
The New Notification Trap
Before you can claim R&D relief, you might need to tell HMRC you’re planning to make a claim through something called a claim notification form. Miss this requirement, and HMRC will throw out your entire claim.
This isn’t just bureaucracy – it’s a compliance measure designed to reduce fraud and give HMRC advance warning of incoming claims. The notification requirement catches two groups of companies: those claiming for the first time, and those who haven’t claimed for more than three years.
You need to notify HMRC if:
- You’re a first-timer: Never claimed R&D relief before and you’re claiming for periods starting after 1 April 2023
- You’re returning: Last claimed more than three years before your notification deadline
- You’ve been irregular: Only made claims by amending returns after certain cut-off dates (these don’t count as “regular” claims)
The deadline is crucial – you have exactly six months after the end of your accounting period to submit this form. Miss it, and you lose your right to claim for that period. HMRC rarely makes exceptions, so this isn’t a deadline you can afford to miss.
Regular claimants who’ve submitted claims within the normal filing process in the past three years don’t need to notify HMRC again.
PAYE Cap: The Cash Limit
There’s a limit on how much cash you can receive from R&D claims, known as the PAYE cap. The good news is that the merged scheme uses the more generous cap calculation from the old SME scheme.
The cap is set at ÂŁ20,000 plus three times your company’s PAYE and National Insurance contributions. For most companies, this means you’re unlikely to hit the limit. If you do exceed the cap, you can carry the excess forward to next year rather than losing it entirely.
Some companies are exempt from the cap altogether, specifically those whose employees are creating or actively managing intellectual property. This exemption recognises that IP-focused businesses often have high R&D costs relative to their payroll.
Additional Information Forms
Every single R&D claim now requires an Additional Information Form (AIF) to be submitted before your claim can be processed. This applies to every scheme – there are no exceptions.
The AIF asks for detailed information about your R&D projects, including technical descriptions of what you’re trying to achieve, how you’re trying to achieve it, and why it qualifies as R&D. You’ll also need to break down your costs by category and provide details of anyone who helped prepare your claim.
This form represents HMRC’s attempt to weed out questionable claims before they’re submitted. It has become a substantial compliance burden that requires careful preparation and a technical understanding of your R&D activities.
Getting Your Next R&D Claim Right
The key to a successful claim under the new system is preparation and timing. Start by working out which scheme applies to you. If you’re a loss-making SME spending more than 30% of your total expenditure on R&D, the intensive scheme could nearly double your relief rate compared to the merged scheme.
Check whether you need to submit a claim notification form, and if so, don’t leave it until the last minute. Remember, you only get six months after your accounting period ends to submit this form.
Document your R&D activities thoroughly. The AIF requirements necessitate detailed project descriptions that clearly explain the technical uncertainties being addressed and how your approach aims to overcome them.
If you use subcontractors or have overseas costs, review these arrangements carefully against the new rules. You might find that work you couldn’t previously claim now qualifies, or conversely, that costs you’ve claimed before no longer qualify.
How Double Point Makes R&D Claims Simple
The reformed R&D system is complex, and the penalties for getting it wrong are severe. At Double Point, we specialise in navigating these complexities and maximising your relief whilst keeping you fully compliant.
We handle everything – from working out which scheme gives you the best outcome, to preparing notification forms, completing AIFs, and submitting your final claim. Our team is always up-to-date with every guidance change and can identify qualifying activities that you might miss.
Contact Double Point today for a consultation about your R&D tax relief. We’ll make sure you claim every pound available under the new rules without the stress of managing the compliance yourself.