01

What qualifies as R and D

The core test is whether the project seeks to achieve an advance in overall knowledge or capability in science or technology and involves overcoming scientific or technological uncertainty that cannot be easily resolved by a competent professional in the field.

The definition is not limited to laboratory research. Software development qualifies where developers are overcoming genuine technical uncertainties. Manufacturing process improvements engineering design work and product development involving technological uncertainty can all qualify. Advances in commercial financial or social science fields do not qualify.

02

Qualifying expenditure categories

Staff costs are typically the largest component including salaries employer NIC and employer pension contributions for employees directly engaged in R and D. Externally provided workers qualify at 65% of costs. Unconnected subcontractor costs qualify at 65% but connected party subcontractor costs do not qualify under the merged scheme.

Consumables used in the R and D process qualify including materials utilities and software licences. Data licences and cloud computing costs became qualifying expenditure from April 2023. Project management support functions and commercial development do not qualify.

03

The merged RDEC scheme

Under the merged scheme qualifying companies receive an above-the-line tax credit of 20% of qualifying R and D expenditure. The credit is taxable but the net benefit after tax for a company paying the 25% main rate is approximately 15% of qualifying spend.

For loss-making companies the merged RDEC is payable in cash after applying a set sequence: first against the corporation tax liability then as a cash payment subject to a PAYE/NIC cap. This makes the scheme valuable for early-stage businesses without a current tax liability.

04

R and D intensive SME enhanced rate

SMEs spending at least 30% of total expenditure on qualifying R and D qualify for an enhanced credit rate of 27%. To qualify the company must meet standard SME thresholds: under 500 employees turnover under 100 million euros or balance sheet under 86 million euros.

For a loss-making startup spending 300,000 on qualifying R and D out of 700,000 total - a 30% intensity ratio - the enhanced 27% credit generates an 81,000 cash payment from HMRC versus 60,000 under the standard rate.

05

Making a successful claim

R and D tax credit claims are made as part of the corporation tax return. Since August 2023 all new claims require an Additional Information Form (AIF) submitted online before the CT600 providing a technical narrative financial breakdown and project details.

The technical narrative is the most important element. It must describe the advance being sought the uncertainties that existed how they were investigated and resolved and why the solution was not readily deducible. HMRC has a dedicated compliance team actively investigating claims.