If you are investing time and money to improve products, services or internal processes, there is a good chance you are leaving cash on the table. R&D tax credits are designed to reward UK companies that take on technical risk to achieve an advance in science or technology. For many SMEs, these tax credits can turn a chunk of development spend into a real cash boost or a lower Corporation Tax bill.
That matters more than ever. Costs are still high, hiring specialist staff is tough, and clients expect faster improvements. At the same time, HMRC has tightened the rules and scrutiny. The number of claims fell to about 46,950 in 2023–24, down 26% year on year (HMRC, 2025), so only the best-prepared claims are getting through smoothly.
UK businesses spent £50.0bn on R&D in 2023 (ONS, 2024), showing that innovation is widespread, not limited to big tech or pharmaceuticals. If we work with you early, we can usually identify qualifying projects, capture the right costs, and translate that activity into compliant R&D tax credits. This blog explains what counts, how the 2025–26 rules work, common pitfalls, and a practical route to a confident claim.
What HMRC means by R&D, and who can claim
R&D for tax purposes is not about wearing lab coats or inventing something nobody has seen before. HMRC focuses on whether your project tried to resolve scientific or technological uncertainty. In plain terms, you are doing R&D if competent professionals could not easily work out how to achieve your goal, and you had to experiment, test or build prototypes to get there.
You can claim if your company is:
- UK limited company, registered and trading
- Subject to corporation tax
- Carrying out projects that meet HMRC’s definition of R&D
This applies across sectors. We see good claims in professional services (for example, developing a new data model or automation tool), hospitality (such as building a bespoke ordering or stock system that pushes technical boundaries), and retail (for instance, designing a new product with novel materials or manufacturing methods).
A quick reality check we do with clients is: what was the uncertainty, why was it hard, and what did your team do to try to crack it? If you can answer those clearly, you are already halfway there.
How the 2025–26 merged scheme works for tax credits
Since accounting periods starting on or after 1 April 2024, the old SME scheme and large company RDEC scheme have been replaced by a single merged R&D Expenditure Credit (RDEC) model for most businesses.
Key points for 2025–26:
- The merged scheme gives a taxable credit of 20% of qualifying R&D spend.
- Because it is taxable, the net benefit depends on your Corporation Tax rate. The main corporation tax rate is 25%, with a 19% small profits rate and marginal relief between £50,000 and £250,000 of profits.
- The credit is shown “above the line” in your accounts, which often makes it easier to see and to explain to stakeholders.
There is also Enhanced R&D intensive support (ERIS) for loss-making SMEs where R&D spend is at least 30% of total expenditure. If you qualify, you can take an extra 86% deduction (total 186%) and potentially a payable credit worth up to 14.5% of the surrenderable loss.
In practice, this means most SMEs now calculate R&D tax credits in a similar way to larger companies, with a stable headline rate. The generosity is still meaningful, but HMRC expects a tighter, better-documented claim.
What costs you can include, and what is often missed
The value of your tax credits claim depends on the costs you capture. Qualifying expenditure usually falls into a few buckets:
- Staff costs: Salaries, employers’ NIC, pension contributions and bonuses for employees directly working on R&D, plus a reasonable share for support staff.
- Externally provided workers and subcontractors: Certain contractors and agency staff can qualify, depending on who bears the technical risk and how the work is structured. The merged scheme has simpler rules here than the old SME scheme.
- Consumables and materials: Items that get used up in the R&D process, including prototypes that are not sold on.
- Software and data licences: If they are used in R&D activity, these can be included.
Costs that do not qualify include routine production, standard troubleshooting, capital spend on buildings, and most marketing or commercial activity.
What SMEs often miss:
- Time spent by senior people in technical decision-making.
- Early “failed” iterations. You do not need success for R&D tax credits, you need uncertainty and a genuine attempt to solve it.
- Supporting documentation that links costs to specific R&D tasks.
If you want a simple way to start tracking, we usually suggest setting up a lightweight project log and cost code. You can read more about how we help clients structure this on our R&D tax credits support page and our wider services for growing SMEs.
The claim process, and why compliance matters now
HMRC has added steps to raise quality and reduce abuse. Your claim is still made through the CT600, but you must also file an Additional Information Form. This form asks for project descriptions, cost breakdowns, and key personnel, and it is mandatory.
A strong claim normally includes:
- Clear project summaries: what you tried to do, the uncertainty, and how you tackled it.
- Evidence of competent professionals: who led the work and why it was not straightforward.
- Cost workings that tie back to payroll and invoices.
- A narrative that matches the numbers.
HMRC is actively checking more claims. Their latest statistics show total support of £7.6bn for 2023–24, and a big shift towards larger, well-evidenced claims (HMRC, 2025). In other words, the opportunity is still there, but sloppy claims are getting filtered out faster.
We also keep an eye on timing. You generally have two years after the end of the accounting period to submit a claim. That sounds generous, but rebuilding records later can be painful. Doing the work alongside the project is far easier.
Practical examples of where SMEs win with tax credits
Here are a few real-world style situations where we regularly see successful R&D tax credits claims:
- Professional services tech build: A consultancy develops a new AI-assisted risk scoring tool that required novel data handling and testing to reach acceptable accuracy. The uncertainty sits in whether the algorithm could meet the required performance with the available data.
- Hospitality systems innovation: A restaurant group creates a bespoke kitchen workflow platform that integrates live supplier data and predictive wastage modelling. Off-the-shelf systems could not do it, so the team had to experiment.
- Retail product development: A manufacturer works on a new composite material for a consumer product, needing multiple prototype cycles to solve durability issues. Prototype materials and staff time qualify.
Each case is different, but the pattern is the same: technical risk, systematic work to resolve it, and properly recorded costs.
Next steps for your claim
R&D tax credits are one of the few incentives that can put cash back into your business simply for pushing things forward. Under the merged scheme, most SMEs can claim a 20% taxable credit on qualifying spend, and loss-making R&D-intensive businesses may get extra support through ERIS. That can mean tens of thousands of pounds to reinvest in staff, tools, or the next round of development.
But the risks are real. HMRC’s tougher approach means vague project descriptions, weak cost links, or “try-it-and-see” claims can lead to delays, reduced relief, or enquiries. The fall in claim volumes shows that the bar has moved.
Our advice is simple: start early, document as you go, and get a qualified review before you file. If you are not sure whether your work qualifies, we can talk it through in plain English and give you a clear view of likely value and effort.
Ready to see what you could claim? Get in touch and ask for an R&D tax credits review. We will help you turn your innovation into compliant tax credits, with no drama and no surprises.
