R&D Tax Relief in the UK: Eligibility, Rates, and How to Make a Claim

If your UK business is working on new products, processes, or technologies, you could be leaving thousands of pounds on the table. The government offers R&D tax relief to help companies offset the cost of innovation-but only if you know how to claim it. Many small and medium businesses miss out because they think it’s only for big tech firms or labs with white coats. That’s not true. If you’re solving technical problems, even in manufacturing, software, or food science, you might qualify.

What Counts as R&D for Tax Relief?

The UK government doesn’t require you to invent the next iPhone. R&D means trying to solve an uncertainty that isn’t easily answered by existing knowledge. It’s about pushing boundaries, not just following instructions. For example:

• Developing a new algorithm to improve delivery routing for a logistics company
• Creating a biodegradable packaging material that breaks down faster than current options
• Adapting existing software to work with a new government data format that has no public documentation
• Testing a new brewing technique to reduce fermentation time while maintaining flavor quality

The key is technical uncertainty. If your team had to experiment, fail, and try again because standard solutions didn’t work-you’re likely doing R&D. Routine upgrades, design tweaks, or following industry standards don’t count. But if you’re asking, "Has anyone done this before?" and the answer is "No," then you’re in the right zone.

Who Can Claim R&D Tax Relief?

You don’t need to be a startup or a spin-out from a university. Any UK-registered company that pays corporation tax can claim, as long as:

• You’re carrying out qualifying R&D activities
• You’re spending money on those activities
• You’re a small or medium-sized enterprise (SME) or a large company

SMEs are defined as businesses with fewer than 500 employees, annual turnover under €100 million, or balance sheet total under €86 million. Most UK businesses qualify as SMEs. If you’re bigger than that, you’re still eligible-but under a different scheme with lower rates.

R&D Tax Relief Rates for SMEs (2026)

For SMEs, the relief works in two ways: enhanced deductions or payable tax credits. Most claimants choose the enhanced deduction because it’s simpler and gives faster cash flow.

Enhanced Deduction: You can deduct 130% of your qualifying R&D costs from your profits before tax. If your company makes a profit, this cuts your corporation tax bill. If you’re loss-making, you can surrender those losses for a cash payment.

Payable Tax Credit: If you’re not profitable and have no tax liability, you can get up to 14.5% of your qualifying expenditure as a cash payment. For example, if you spent £100,000 on qualifying R&D, you could receive £14,500 back.

These rates haven’t changed since 2023, but HMRC has tightened documentation rules. You must now show clear records linking costs directly to R&D activities.

What Costs Qualify?

Not everything you spend on innovation counts. HMRC is strict about what’s allowed. Here’s what you can include:

• Staff wages and employer NICs for employees directly involved in R&D
• Subcontractor costs (up to 65% of payments to external contractors)
• Software used specifically for R&D (not general office tools)
• Utilities like electricity, water, and heating used in R&D spaces
• Materials consumed during experiments (e.g., chemicals, prototypes)
• Costs of clinical trials for medical or biotech projects

What’s excluded? Furniture, rent, patent filing fees, marketing costs, and costs for non-UK staff unless they’re working on-site in the UK. You can’t claim for R&D done outside the UK unless it’s part of a cross-border collaboration approved by HMRC.

How to Make a Claim

There are four clear steps to claim R&D tax relief.

1. Track your qualifying costs throughout the year. Keep timesheets, project logs, invoices, and bank statements linked to each R&D activity. Don’t wait until year-end.
2. Prepare a technical narrative explaining what you were trying to achieve, why it was uncertain, and how you solved it. This isn’t a scientific paper-it’s a plain-language summary for HMRC. Include examples like: "We tried three different material blends to reduce heat degradation, but only the fourth version met our durability target after 17 test cycles."
3. Complete the CT600 tax return and include a detailed R&D claim section. You’ll need to report your qualifying expenditure and the amount of relief claimed.
4. Submit to HMRC with your company’s corporation tax return. You can claim for the current year and up to two previous years if you haven’t claimed before.

You don’t need an accountant to file-but many businesses use specialists because HMRC often requests more evidence. A well-prepared claim reduces delays. On average, claims are processed in 8 to 12 weeks.

Common Mistakes That Get Claims Rejected

HMRC rejects nearly 1 in 3 claims-not because they’re fake, but because they’re poorly documented. Here are the top three reasons claims fail:

• Too vague - Saying "We developed new software" without explaining what made it technically challenging.
• Mixed costs - Including non-qualifying expenses like office rent or sales commissions.
• No evidence - No timesheets, no project notes, no test results. HMRC asks for proof, not promises.

One food tech company lost £28,000 because they claimed for packaging design without showing how it differed from existing solutions. Another software firm had their claim cut in half because they didn’t separate R&D coding time from regular bug fixes.

What Happens After You Claim?

HMRC may contact you for more information. This doesn’t mean you’re under suspicion-it’s standard procedure. They’ll ask for:

• Project descriptions
• Staff roles in R&D
• Cost breakdowns
• Proof of expenditure

Keep all records for at least six years. If you’re audited, you’ll need to show what you spent, why it was R&D, and how you calculated the claim. Having clear, organized files makes this easy.

Once approved, the money usually arrives within 12 weeks. For loss-making companies, it’s a direct bank transfer. For profitable ones, it reduces your corporation tax bill.

Can You Claim if You’ve Had Funding?

Yes. Receiving grants, subsidies, or investment doesn’t automatically disqualify you. But if you’ve taken a grant specifically for R&D (like Innovate UK funding), you can’t claim the same costs under both schemes. You’ll need to separate the costs. For example:

• £50,000 spent on R&D
• £20,000 covered by an Innovate UK grant
• £30,000 paid by your company

You can claim relief on the £30,000, but not the £20,000. Always check the grant terms-some allow partial claims, others don’t.

What If You’re Not Profitable?

That’s actually the best time to claim. Loss-making companies get the most value from R&D tax relief. Instead of reducing future tax bills, you get cash now. Many startups use this money to pay rent, hire engineers, or fund the next phase of development.

One AI startup in Manchester received £41,000 in cash after claiming on £283,000 in R&D spend. They used it to hire two developers and extend their beta testing period. Without the relief, they would’ve had to pause development.

Next Steps: What to Do Now

If you’re unsure whether your work qualifies, start here:

• Review your last 12 months of spending on innovation projects
• Identify three activities where you faced technical uncertainty
• Collect any existing records: emails, lab notes, developer logs, supplier invoices
• Compare your activities to HMRC’s official guidance (published on GOV.UK)

You don’t need to be perfect. Even a partial claim is better than nothing. Many businesses claim only 40% of what they’re entitled to. Start small. Document what you can. And if you’re still unsure, get a free eligibility check from a specialist-most offer this without obligation.