R&D tax credits UK small business | Figures Chartered Accountants

Research and development tax credits are one of the most valuable reliefs available to UK businesses, yet many small companies either do not know they qualify or underestimate how much they could claim. R&D tax credits for UK small businesses can reduce your corporation tax bill or even generate a cash payment from HMRC. This guide explains how the scheme works, who qualifies, and how to make a claim.

We cover the SME R&D scheme, the merged scheme (RDEC), what counts as qualifying R&D, and the practical steps to submit a claim. If you are a UK limited company that develops products, processes, or services, this article is for you.

What are R&D tax credits?

R&D tax credits are a government incentive designed to encourage UK businesses to invest in innovation. If your company spends money on research and development, you may be able to claim tax relief that reduces your corporation tax bill or provides a cash credit.

There are two main schemes:

SME R&D scheme: For companies with fewer than 500 employees, turnover under 100 million euros, and a balance sheet under 86 million euros. This scheme offers the most generous relief.
Merged scheme (RDEC): From 1 April 2024, HMRC merged the large company RDEC scheme and introduced changes to how claims work. Companies that do not qualify as SMEs, or SMEs that are subcontracted to do R&D by a large company, use this route.

Most small businesses will claim under the SME scheme or the merged regime depending on their accounting period. Your accountant can confirm which applies to you.

Who qualifies for R&D tax credits?

To qualify, your company must be a UK limited company subject to corporation tax. The R&D must be a project that seeks to achieve an advance in science or technology. HMRC's definition is broad, but the key tests are:

Advance in science or technology. The project must aim to achieve something that is not readily deducible by a competent professional in the field. It does not have to be ground-breaking; incremental improvements can qualify.
Technological uncertainty. There must be uncertainty about how to achieve the advance, whether it can be achieved at all, or the most efficient method.
Systematic approach. The work must be carried out in a systematic way, planned and evaluated as it progresses.

Examples of qualifying R&D

R&D tax credits are not just for labs and white coats. Many everyday business activities can qualify:

Developing new software or significantly improving existing software
Designing new products or improving manufacturing processes
Creating new materials, formulations, or recipes
Developing new construction methods or engineering solutions
Building prototypes or running trials
Overcoming technical challenges in delivering a project

The key is that there must be a technical challenge or uncertainty. Routine development, cosmetic changes, or simply using existing technology in a standard way generally does not qualify.

What does not qualify

Commercial innovation without technical uncertainty (e.g. new marketing strategy)
Work done after the technical uncertainty is resolved
Social sciences, economics, or business research
Arts, humanities, or non-scientific research

What costs can you claim?

You can claim relief on costs directly attributable to the R&D project. The main categories are:

Staff costs. Salaries, wages, employer NI, and pension contributions for employees directly involved in R&D. You can also claim for employees who supervise or support the R&D work.

Subcontractor costs. Payments to external contractors or freelancers for R&D work. Under the SME scheme, you can claim 65% of subcontractor costs. Under the merged scheme, the rules differ.

Consumables. Materials, utilities, and items used up or transformed in the R&D process. For example, raw materials used in prototyping.

Software. Licences for software used directly in the R&D work.

Clinical trials volunteers. Payments to volunteers in clinical trials (mainly relevant to life sciences).

You cannot claim for capital expenditure (e.g. buying equipment), rent, or overheads that are not directly attributable to R&D. However, capital items may qualify for capital allowances separately.

How much can you save?

The benefit depends on which scheme you claim under and whether your company is profitable:

SME scheme (for accounting periods beginning before 1 April 2024):

Profitable companies: An additional deduction of 86% of qualifying spend, which at the 25% corporation tax rate gives an effective benefit of roughly 21.5p per pound spent.
Loss-making companies: You can surrender the loss for a tax credit of up to 10% of the enhanced expenditure.

Merged scheme (from 1 April 2024):

An above-the-line credit of 20% of qualifying R&D spend. After corporation tax, this gives a net benefit of 15% for profitable companies (at the 25% rate) or 16.2% for loss-making companies.

Example: A small software company spends £100,000 on qualifying R&D (staff costs and software). Under the merged scheme, it receives a credit of £20,000. If it is profitable, the net benefit after tax is £15,000. For a loss-making company, the benefit is slightly higher.

These figures are simplified. Your accountant or a specialist adviser can calculate the exact benefit for your business. Our Statutory Accounts & Tax team works with R&D advisers to maximise claims.

How to make a claim

R&D tax credits are claimed through your corporation tax return (CT600). The process is:

Identify qualifying projects. Review the work done in the accounting period and identify projects that meet the advance-in-science-or-technology test.
Calculate qualifying costs. Add up staff costs, subcontractors, consumables, and software attributable to each project.
Prepare a technical narrative. HMRC requires a written explanation of what the project aimed to achieve, the technological uncertainty, and how the R&D addressed it. This is the most important part of the claim.
Complete the CT600 and supplementary pages. Your accountant includes the R&D claim in your corporation tax return.
Submit the Additional Information Form (AIF). From 1 August 2023, HMRC requires a separate digital form with project-level detail before submitting the CT600.
Wait for HMRC to process. Most straightforward claims are processed within a few weeks. HMRC may open an enquiry if they want more detail.

Claims must be made within two years of the end of the accounting period. Do not leave it too late. For more on deadlines, see HMRC's R&D tax credits guidance.

Common pitfalls

Not claiming at all. Many small businesses do not realise they qualify. If you develop software, products, or processes, it is worth checking.
Poor technical narratives. HMRC is increasingly scrutinising claims. A vague or generic description of your R&D will not pass muster.
Including non-qualifying costs. Only costs directly attributable to R&D qualify. General overheads, capital items, and costs after the uncertainty is resolved do not count.
Missing the deadline. You have two years from the end of the accounting period to claim. Miss it and the relief is lost.

UK tax and legal accuracy

The R&D tax credit rules described here reflect the position for accounting periods beginning on or after 1 April 2024, following the introduction of the merged scheme. The SME scheme rates apply to earlier periods. HMRC updates guidance and rates periodically; always check the latest position. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action.

Frequently asked questions

Can a small company still use the SME scheme?

For accounting periods beginning on or after 1 April 2024, the SME scheme and RDEC have been merged into a single scheme. For earlier periods, SMEs use the SME scheme. Transitional rules may apply.

Do I need a specialist to make an R&D claim?

Not necessarily, but a specialist can help identify qualifying activities, calculate costs accurately, and write the technical narrative. This often increases the value of the claim and reduces the risk of an HMRC enquiry.

What if HMRC enquires into my claim?

HMRC may ask for more detail about the projects, the technical uncertainty, and the costs. A well-prepared claim with a strong technical narrative and clear cost records will stand up to scrutiny. Your accountant or adviser can handle the enquiry on your behalf.

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

Yes. The relief is based on the attempt to achieve an advance, not on whether the project succeeded. If there was genuine technological uncertainty and a systematic approach, a failed project still qualifies.

How long does it take to get a refund?

Most claims are processed within four to eight weeks. Complex claims or those selected for enquiry can take longer.

Summary and next steps

R&D tax credits for UK small businesses offer genuine savings if you are developing products, software, or processes. Identify your qualifying projects, calculate the costs, and prepare a strong technical narrative. Do not miss the two-year deadline.

If you think your company might qualify, we can help. At Figures Chartered Accountants we work with UK limited companies to prepare accounts and identify tax reliefs. Book a discovery call or see our Statutory Accounts & Tax service to find out more.