R&D Tax Credits Explained: Is Your Business Eligible?

Research and Development or R&D tax credits are a form of tax relief for companies that invest in developing new products, processes, or services, or in solving technical problems for which no readily available solution exists.

But R&D relief isn't limited to businesses working in traditional scientific research.

A software company developing a new system, for example, may qualify if it faces genuine technological uncertainty. A manufacturer may also qualify if they’re trying to develop a more efficient production process.

This guide explains who can get R&D tax relief, how it works, which costs you can claim, and which deadlines you need to be aware of.

Key points

• You can claim for a range of R&D costs 💷
  Qualifying expenses can include staff costs, certain subcontractor and externally provided worker costs, software, consumables, utilities, data licences, and cloud computing. The costs have to be directly connected to qualifying R&D activity.
• R&D claims have strict deadlines and filing requirements 📅
  Depending on your circumstances, you may need to submit a claim notification form within six months of the end of your period of account. You also have to submit an additional information form before or at the same time as your CT600, while the overall claim deadline is generally two years from the end of the accounting period.
• A strong claim needs clear evidence 📝
  HMRC looks at why the problem was technically difficult, why the solution wasn’t obvious, what you tried, and what you learned. Keeping records throughout the project helps you build a credible claim later.
• ANNA can simplify the tax admin behind your R&D claim 🚀
  Keeping your books, expenses, receipts, and tax information organised throughout the year makes it easier to work out your Corporation Tax position and gather the financial information needed for an R&D claim. ANNA automates this day-to-day admin, so you can focus on your research.

Who can claim R&D tax credits?

R&D tax credits are only available to limited companies that pay Corporation Tax.

Sole traders, partnerships, and charities can't claim the relief, since it's built into the Corporation Tax system and isn’t a stand-alone grant.

However, there's no minimum size or sector restriction. R&D tax credits aren't just for tech startups or pharmaceutical companies.

Construction firms working out how to solve an unusual structural problem, food producers developing a new preservation process, and agencies building custom software all potentially qualify, provided the work meets HMRC's definition of R&D.

🧠 Good to know

You don't need to have succeeded in a project for it to qualify. If your company tried to solve a technical problem and failed, the costs involved in that attempt can still count as qualifying R&D expenditure.

What counts as qualifying R&D

HMRC looks at two main factors:

• Whether the project sought to achieve a scientific or technological advance
• Whether there was genuine uncertainty about whether it could be achieved

That second factor matters more than you might expect. If a skilled person in your industry could have looked at the problem and known the answer straight away, it's not R&D for tax purposes, even if it took you significant time to work through it.

What HMRC is looking for is a project where the outcome wasn't already known, and where you had to test, experiment, or iterate to find out whether it would work.

Some examples that typically qualify are:

• Developing a new software product or a new feature
• Improving a manufacturing process to increase efficiency, reduce waste, or handle a new material
• Creating a new formulation, material, or process

💡 Did you know?

A project doesn't have to be your company's core business activity to qualify. If a retailer builds custom software internally to solve a genuine technical problem, the development work behind that software may qualify for R&D relief.

How R&D tax credits work

Most companies now claim under a single merged scheme, which applies to accounting periods starting on or after 1 April 2024. Under this scheme, you get a taxable credit worth 20% of your qualifying R&D expenditure.

Because the credit is taxable, the actual cash benefit is lower than 20% after Corporation Tax has been applied. For a profitable company paying the 25% main rate, the net benefit is around 15% of qualifying expenditure. For a company paying the 19% small profits rate, or a loss-making company taking the credit as cash, the net benefit is closer to 16.2%.

Enhanced R&D Intensive Support

If you’re a loss-making SME and your qualifying R&D expenditure is at least 30% of your total spending, you may qualify for Enhanced R&D Intensive Support (ERIS) instead. ERIS offers a considerably higher cash credit, worth up to 27% of qualifying R&D spend, since it isn't subject to Corporation Tax in the same way as the merged scheme credit.

What costs qualify

Once you know a project qualifies, the next question is which of your costs count as qualifying expenditure.

The main categories are:

• Staff costs: Salaries, employer National Insurance, and employer pension contributions for staff directly working on the qualifying R&D, along with a proportion of costs for staff who split their time between R&D and other work
• Subcontractor and externally provided worker costs: Payments to contractors or agency staff working on the R&D, subject to specific rules on how much of the cost qualifies
• Software and consumables: Software licences used directly for the R&D, along with materials consumed or transformed during the project
• Utilities: A proportion of power, water, and fuel costs directly attributable to the R&D activity

The rules also allow certain data licence and cloud computing costs to be included when used directly for qualifying R&D. These two categories were added as part of the R&D tax relief reforms, so they carry tighter conditions. Check whether your specific costs meet the requirements before including them in a claim.

Costs that fall outside the project, such as general overheads, rent, or capital equipment, generally don't qualify in the same way.

How to make a claim

There are three steps to claiming R&D relief, and missing any one can invalidate the whole claim.

Step 1: Submit a claim notification form to HMRC

If this is your company's first claim, or you haven't claimed in the last three years, you have to submit a claim notification form to HMRC online.

It’s due within six months of the period of account your claim falls into, which is the period your annual accounts cover. There are no extensions. If your accounts cover the year to 31 December, your notification deadline is 30 June the following year.

Step 2: File an additional information form

You also have to file an additional information form, which sets out the technical details behind your claim, including which projects qualify and why, as well as the costs involved.

It doesn't have a fixed deadline, but you have to submit it before or at the same time as your CT600, or HMRC won't accept the claim.

Step 3: Make your claim through your CT600

You have up to two years from the end of your accounting period to submit a claim. The deadline may sound generous, but it’s usually tight once you factor in the time it takes to assemble a robust technical and financial case.

Cash payment or tax reduction: Which do you get?

If your company is profitable, your R&D tax credit is usually applied directly against your Corporation Tax bill, reducing what you owe. If your company is loss-making, or your credit is worth more than your Corporation Tax bill for the year, you can receive some or all of it as a cash payment from HMRC instead.

That cash option matters a lot for early-stage or growing companies that are investing heavily and not yet turning a profit. It means R&D relief can be a genuine source of funding rather than just a future tax saving, which often makes the biggest practical difference to cash flow.

🧠 Good to know

There is a limit on how much can be paid out as cash, based on your company's PAYE and National Insurance costs for the period. This exists to prevent the credit from being used to extract cash from a company with very little UK employment activity.

Most companies with a genuine R&D team don't come close to hitting this cap, but it's good to know it exists if your claim is large relative to your payroll.

Getting the technical narrative right

HMRC reviews many R&D claims, and the projects most likely to attract scrutiny tend to be those that:

• Are large relative to the company's size
• Come from sectors not traditionally associated with R&D
• Rest on a thin technical basis

A strong claim explains, in plain terms, what the technical problem was, why the answer wasn't obvious or already available, what you tried, and what you learned along the way.

Keeping notes as the work happens, rather than reconstructing the story months later when you come to claim, makes a real difference to how convincing that explanation ends up being.

If a claim doesn't hold up under an HMRC enquiry, you're not just looking at the credit being reduced. It can also mean penalties and closer scrutiny of future claims, so it's important to take as much care over the narrative as you do over the numbers.

How ANNA can help with your R&D tax admin

To ensure a successful R&D tax claim, you need accurate financial records, correctly categorised expenses, and a clear picture of your company’s Corporation Tax position. But maintaining all of that takes time away from the projects the claim is meant to support.

ANNA can help simplify the financial admin around your tax obligations with:

• Automatic bookkeeping: Keep your income and expenses organised throughout the year, so you have accurate records when you need to work out your tax position
• Real-time tax estimates: See an up-to-date estimate of your Corporation Tax bill as your business finances change
• Receipt capture: Keep receipts linked to your transactions for a clearer audit trail of your business expenses
• Corporation Tax support: Have your company’s financial information organised and enjoy easier Corporation Tax admin
• VAT tracking: Keep track of VAT on your business transactions and stay on top of your VAT obligations
• PAYE support: Manage PAYE-related tax admin alongside your other business finances
• Free Self Assessment filing: Manage personal tax obligations, with free Self Assessment filing for your first year
• Smart Pots: Set money aside for upcoming tax bills automatically, and avoid a last-minute scramble when payment deadlines approach
• Confirmation Statement reminders: Stay on top of key Companies House deadlines alongside your tax obligations
• 24/7 support: Get help with your ANNA account whenever you need it, without waiting for traditional office hours

Get started with ANNA today, and start your R&D claim with the numbers already in order.