Research and development (R&D) can feel like a luxury when you are trying to manage rising costs, tight cashflow and staff pressures. Yet for many UK companies, R&D tax credits remain one of the most effective ways to reduce corporation tax or bring cash back into the business.
Despite this, HMRC’s latest R&D tax credits statistics estimate 46,950 claims in 2023/24 – a fall of 26% on the previous year, even though qualifying R&D expenditure is around £46.1bn. Many businesses are either unsure whether they qualify, put the claim off until it is too late or have been put off by negative headlines about enquiries and repayment demands.
Since 1 April 2024, the rules have changed again. The separate small and medium-sized enterprise (SME) and R&D expenditure credit (RDEC) schemes have been replaced by a single “merged scheme” alongside enhanced support for R&D-intensive businesses. The core message, though, is the same: build R&D into your tax strategy early and you are more likely to unlock value, manage risk and support long-term financial resilience.
In this article we explain how tax credits work under the new regime, where HMRC is focusing its attention and how regular reviews with your accountant can help you claim with confidence.
What R&D tax credits look like for 2025/26
For accounting periods beginning on or after 1 April 2024, most companies now claim under the merged RDEC scheme. A separate enhanced R&D intensive support (ERIS) regime offers extra help to businesses where qualifying R&D makes up at least 30% of total expenditure (gov.uk).
Key features under the merged scheme include the following
- Single regime: All sizes of company use the same basic rules for qualifying expenditure and the same 20% expenditure credit rate on qualifying R&D costs.
- Taxable credit: The credit is treated as taxable income, then set against your corporation tax bill. At the current 25% main rate, the effective benefit for many companies is around 15% of qualifying spend.
- Support for intensive businesses: ERIS can enhance the benefit for loss-making, R&D-intensive SMEs, helping them maintain investment when cash is tight.
A simple example: if your company spends £200,000 on qualifying R&D, the merged scheme credit is £40,000. After corporation tax, the net benefit is likely to be around £30,000. That can fund the next prototype, a key hire or investment in your systems.
Because the new regime interacts closely with year-end dates, loss relief and other reliefs, it is important to review your wider business tax planning each year, rather than treating tax credits as a standalone exercise.
Who can claim and what HMRC expects
The starting point is HMRC’s definition of R&D for tax purposes. In broad terms, your project must:
- aim to make an advance in science or technology
- involve scientific or technological uncertainty that competent professionals could not easily resolve
- go beyond routine testing, cosmetic changes or simple configuration work.
HMRC’s tool on checking if a project includes qualifying R&D activities is a good sense check for first time claimants.
You do not need to be in a laboratory or a life sciences business. We regularly see successful claims from:
- software developers improving platform performance or building new features
- manufacturers redesigning production processes to reduce waste or achieve tighter tolerances
- engineering firms experimenting with new materials or methods to meet demanding client specifications.
The key is to build the claim around the real technical challenges and uncertainties your team faced, not around generic marketing copy. Detailed project records, timesheets, design notes and test results all help demonstrate that work meets the R&D definition.
How tax credits support innovation and cashflow
Used properly, tax credits can play a central role in funding innovation and smoothing cashflow.
For profitable companies, the merged scheme reduces the corporation tax bill, freeing up cash you can reinvest in product development, staff and systems. For loss-making companies, the credit can be paid in cash, subject to certain caps and conditions, which can be especially valuable for early-stage or scale-up businesses (gov.uk).
Planned into your tax strategy, R&D support can help you do the following.
- Protect cashflow: Bringing forward tax savings can reduce the strain of long development cycles and delayed customer revenues.
- De-risk larger projects: Knowing that a proportion of qualifying costs will effectively be subsidised makes it easier to back higher risk innovation.
- Compete for talent: Being open about your R&D pipeline and use of tax credits can support recruitment and retention of technical staff.
We find the most successful clients treat R&D claims as part of an ongoing review cycle, not a one-off exercise. Regular conversations about new projects, changes in technology and customer demands make it easier to identify qualifying activity early, shape the project structure and collect the right evidence from day one.
If you want to explore how this fits into your business, our R&D tax relief support page sets out how we approach claims and the information we typically need.
Common pitfalls and HMRC risk areas
HMRC has significantly stepped up its compliance activity on R&D tax credits, driven by concerns over error and abuse. That makes process and documentation just as important as eligibility (The Times).
Some of the issues we see are the following.
- Weak project descriptions: Vague narratives that do not explain the scientific or technological advance, the baseline or the uncertainties faced.
- Poor cost allocation: Estimates with no link back to timesheets, payroll or project records, or inclusion of non-qualifying costs such as routine maintenance.
- Misunderstanding subcontractor rules: Especially where overseas teams are involved or where work is spread across several group companies.
There are also new procedural traps.
- Additional information form: For most claims you must now submit an online additional information form before or alongside the company tax return. If you do not, HMRC will simply remove the claim. See HMRC’s guidance on submitting detailed information before you claim R&D tax relief.
- Claim notification: If you are claiming for the first time, or have not claimed for more than three years, you must notify HMRC that you intend to claim, generally within six months of the end of the period of account. Full details are on HMRC’s claim notification guidance page.
Because missing these steps can make an otherwise valid claim ineffective, it is important to talk to your accountant well before your filing deadlines, especially if you are revisiting R&D after a gap or changing advisers.
Building a robust approach to R&D claims
Good process does not have to be burdensome. A few practical habits can make your tax credits claims far more robust.
- Ownership inside the business: Appoint a senior technical and financial contact to sponsor each claim and sign off the final report.
- Project-level records: Encourage engineers, developers and other staff to keep brief notes of challenges, tests and failures as they go.
- Simple tagging of costs: Tag R&D time and expenditure in your accounting or project system so that qualifying costs can be pulled through quickly.
We work with many clients to align their R&D process with wider business tax planning, helping them decide when to claim, how to manage losses and how tax credits interact with other reliefs and grants.
Bringing R&D tax credits into your wider tax strategy
R&D tax credits are no longer something that can be dealt with at the last minute. The merged scheme, claim notification rules and additional information requirements all point in the same direction: HMRC wants better quality claims from businesses that treat innovation and tax planning as part of normal governance, not as an afterthought (gov.uk).
For you, that creates both risk and opportunity. Leave claims until close to the filing deadline and you may miss notification windows, struggle to gather evidence and face a greater likelihood of inquiry. Build R&D into your annual planning cycle and you can shape projects, track costs and evidence, and use tax credits to support long-term investment in new products, processes and technology.
As we move through the 2025/26 tax year, our recommendation is simple: review your current and planned projects now, identify where genuine scientific or technological uncertainty exists, and map out the steps needed to support a claim. If you are unsure whether work qualifies, or you have not claimed for several years, professional advice can help you test eligibility and avoid missteps.
If you would like a structured review of your innovation pipeline and existing claims, we can assess your position, highlight risks and opportunities, and help you make the most of available tax credits. To discuss your projects and the support available, please get in touch with us.